Crisis Management in Organization Development

• What are the differences between risk, problem, emergency, crisis, disaster, and catastrophe?

• How should an organization conduct a risk audit?

• How is a crisis team formed and what does it do?

• What are the stages of crisis management?

• What do managers need to know and do to facilitate a recovery?

Agenda

The Changing Nature of Business Crises

1990 2001

Catastrophes 5.5% 5.0%

Casualty accidents 4.8% 4.6%

Environmental 7.8% 1.8%

Class action 2.2% 23.1%

Consumer action 2.8% 2.6%

Defects/recalls 5.4% 14.9%

Discrimination 3.3% 2.7%

Labor disputes 10.3% 12.4%

White collar crime 20.4% 7.8%

Workplace violence 3.8% 12.3%

• 89% of Fortune 500 execs believe that crises are inevitable today

• 50% of F500 execs do not have a crisis management plan

• Of those who have had a crisis, 42% STILL do not have a plan!

• yet…97% felt confident that they could respond well to a crisis

• less than 25% of Global 2000 Enterprises have a business continuity plan

• only 50% have tested their disaster recovery plans

• only 63% of businesses with continuity plans have enterprise wide plans

• only 20% of plans are shared with critical third parties

Crisis Survey of Fortune 500 Executives

WTC Business Fallout

• An estimated 14,600 businesses inside and around the World Trade Center were impacted by the disaster

• 13.4 million square feet of space in six buildings in and surrounding the WTC complex were destroyed

• 36 miles of new cable had to be installed by Consolidated Edison

• 652 companies occupying 28.6 million square feet of space were temporarily or permanently displaced by the destruction

• 200,000 Verizon Communication lines were knocked out by network failures

• 12,000 Con Edison customers had their power cut

• Indirect impact to U.S. businesses has been estimated at $151 billion in the first year

• 90% of businesses that lose data from a disaster shut down within 2 years of the disaster

• 80% of businesses without a well structured recovery plan close within 12 months of flood or fire

• 43% of companies experiencing a disaster never recover

• 50% of a company experiencing a computer outage are forced to close within five years

• 43% of companies that have a business continuity plan do not test it annually

• 80% of companies have not developed CM to provide IT coverage for business continuity

• 25% of financial institutions have no continuity plan

• 40% of companies that have CM plans do not have a team dedicated to disaster recovery

• 58% of UK organizations were disrupted by 9-11, with 13% severely affected

…and the King’s business fares no better… (UK statistics)

• Only 23% of businesses have no early warning of some kind; about 75% of crises result from inappropriate action or inaction by top management

• 13 months before the 3-Mile Island disaster a senior engineer warned of the pending accident

• Evidence of threats against the US, use of planes as weapons, and infiltration by Islamic terrorists to the US were all known before 9-11

• Years before Enron collapsed, Arthur Anderson found $51 million of accounting problems in Enron’s books

• Executives Cynthia Cooper of WorldCom and Sherron Watkins of Enron both tried to give warnings of accounting irregularities before the crisis

• Roger Boisjoly, O-ring engineer for Morton Thiokol warned that there was “blow-by” on the Challenger shuttle O-rings

Early Warning Systems don’t work if you don’t use them

• 72% crises escalated

• 72% were subject to close media scrutiny

• 32% received government scrutiny

• 55% interfered with normal business operations

• 52% damaged company bottom line

• 35% damaged company’s reputation & image

When crises occur, they are disruptive. A survey of Fortune 500 execs showed:

Companies that did not have a crisis plan performed poorly over time

Companies that have a crisis plan may have an increase in price share after an event

Types of Signals

ExternalInternal

People

Technical

Communities

Special Interests

MediaConsumers

Remote

Sensing

Government

Monitoring

Industry

Gossip / Rumors

Personal

Networks

The Culture

Personal Data

Bases

PCs

IT

Crisis Mechanisms

Red flags may include

• increasing numbers of consumer complaints;

•a growing number of safety problems or accidents;

•a rash of lawsuits;

•troubling rumors;

•more frequent quality control issues;

•labor unrest, including poor morale or tension among employees.

A survey of Fortune 500 execs showed that 57% had identified warning signs in the previous 12 months, and 38% said it developed into crisis

Survey of colleges and comparison of training (preparation) vs actual crisis experience

Ian I. Mitroff, Michael A. Diamond, and C. Murat Alpaslan (2008).How Prepared Are America's Colleges and Universities for Major Crises? Assessing the State of Crisis Management. URL: http://www.scup.org/knowledge/crisis_planning/diamond.html

• To what kinds of crises (industry & organizational) is your organization most vulnerable?

• What is the likelihood of their occurrence?

• What would the degree of impact be?

Risk Assessment

Low Impact

High Impact

Low Probability High Probability

Red ZoneAmber Zone

Gray ZoneGreen Zone

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Risk Categorization

Hazard Severity

Hazard Likelihood

You can also categorize types of risks in terms of their impact and probability

Stages of Crisis Management

Signal detection

Warning signs & efforts to prevent

Probing & prevention

Search risk factors & reduce potential

for damage

Damage containment

Keep from spreading to uncontaminated

areas

RecoveryReturn to normal operations asap

LearningReview & critique

CM efforts for improvements

Mitroff’s Five Stages of Crisis Management

Fink’s Crisis Lifecycle

ProdromalRisk cues that potential crisis can emerge

Crisis breakoutTriggering event with resulting damage

ChronicLingering effects of crisis

ResolutionCrisis no longer a concern to stakeholders

Like most human events, crises can be described in terms of stages, or relatively identifiable sequences of events and reactions. Stages enable planners to monitor risks, progress, target stakeholders, and take strategic action appropriate to the stage. There are many models; below are two prominent ones:

Ecomap of Stakeholders

Primary Effect

Secondary (Vicarious) Effect

Tertiary Effect

An “ecomap” or ecological map of stakeholders can help to identify all involved parties in the crisis. Concentric circles are used to set parameters on primary or direct stakeholder involved, secondary or “spillover” effected, and tertiary or very indirect affected. These help prioritize response to them and ensure that no one is left out of consdieration.

Crisis Management Team Formation– selling the idea

Team discussion questions

1. What are the likely objections & barriers to implementing a Crisis Management Team (CMT)?

2. If you were going to prepare an argument promoting a CMT, what are the key points and sequence in your argument?

3. Who in an organization (general positions) should be selected as a CMT member?

4. What are the technical skills and personal qualities that members should have?

5. What training in CM and team process should be required?

6. What are the effects of stress on decision making and what countermeasures should be taken?

Presenting the CM Concept

• What are the risks in your industry & examples of crises?

• What are the adverse outcomes of not preparing, and advantages to preparing?

• How would CM be compatible with the mission & vision of the organization?• What would it take to implement a CM team?• What are the downsides to implementing a team and how can such

objections be overcome?• What special areas of representation, knowledge, and skill are necessary for

selection?• What kinds of skill training are necessary in CM and teamwork?• What kind of resources and allocation would be necessary for a CM system?• What would a comprehensive system of CM look like and how would it

change the organization?

Typical team composition:• Facility management • Legal department • Risk management• Information technology • Human resources • Financial services • Real estate management • Corporate security • Public relations/

communications

Team Composition: Membership should be based on representation, knowledge, and skill.

Key roles:• Executive/CEO– responsibility &

authority• Team leader (may be CEO)– keep team

updated and focused• Spokesperson– public relations, central

source of information, communications, rumor control

• Legal representative– legal guidance & implications of actions

• Researchers– gather facts & compile information for position statements

• Coordinate all crisis related activities• Gathering and reviewing facts of the crisis• Determining crisis response activities• Allocate resources• Specifying internal and external communications• Training staff• Establishing working relationships with external stakeholders• Monitor progress and continuing situation assessment

Define the duties of the team:

CM Team Training

• Team building• Acquaintance & awareness of styles• Openness & trust• Cohesion, constructive team norms, groupthink countermeasures

• Understanding of risks & crises, impact & consequences unique to the organization & industry

• Understanding of key crisis concepts and practices• Overview of crisis planning and management process

Ensure that all CMT members are trained before the crisis occurs

Four responsibilities:• To the customers• To the employees• To the communities they serve• To the stockholders

When the Johnson & Johnson Company faced the Tylenol poisonings in 1982 they applied the Four C’s quite effectively. They relied on the value and strength of their culture credo which also identified the stakeholders

Tylenol Case Analysis

Background

• In the mid 1950’s Tylenol became a needed and popular substitute for aspirin for such conditions as flu and chicken pox, since aspirin was related to Reyes Syndrome (liver degeneration, brain edema, 20-30% fatality)

• Large market: 100 million users, 19% of corp profits, 13% of year to sales growth, 37% market share of painkillers, outselling other top analgesics combined

• J&J was one of the “Best 100” companies to work for• Tylenol became a product trusted by physicians and families alike• Numerous other Tylenol products were developed for an active market• J&J strong “family” corporate culture

Tylenol Case

The Crisis Begins…

• September 1982 Extra Strength Tylenol bottles of at least 6 pharmacies and food stores were opened, & capsules were filled with cyanide (10,000 x fatal dose)

• Media reporter asked PR Asst. Dir Andrews about poisoned Tylenol– then it hit the news!

• 7 people died in the Chicago area

• CEO James Burke refers to the Credo, alerts to the danger, & assigns team to discover the source

• Formed 7-member strategy team

• Stop the killings

• Reasons for the killings

• Provide protection & assistance to people

…and snowballs!

• Police drove through streets with loudspeaker warnings• Chicago hospital received >700 calls in one day• Immediate stories in major magazines and newspapers• Over 100,000 separate news stories ran in US papers• Hundreds of hours of national and local TV coverage• >90% of Americans had heard of the Chicago deaths• Widest coverage since Kennedy assassination & Viet Nam• Copycat tampering– 270 reported incidents (36 true)

Poison Madness in the Midwest--Time Magazine

The Tylenol Scare--Newsweek

Tylenol, killer or cure?-- Washington Post

• J&J stock fell 7 points• Market share dropped from 35% of pain-reliever market to 8%

Initial Response– Phase 1 Crisis response

• Immediate alert to consumers not to use any type Tylenol product or resume use until extent determined

• Live TV satellite feed of press conferences; media exposure via 60 Minutes, Donahue, etc.

• 800# Hotline for customers (30,000 calls in Oct-Nov)• Toll-free phone for news organizations; pre-taped messages and updated

statements for distribution• Strict production, different lot $, & crisis only in Chicago indicated post-production

tampering• Withdrew bottles from Chicago area; ordered recall of >31 million bottles nationally

at a cost of >$100 million (against FDA & FBI)• It temporarily ceased all production of capsules• High public profile and repeated reassurance by Burke• Working relationship with law enforcement agencies• Notification of health professionals nationwide & FDA

Initial Response—Phase 2, PR Rebound

Five-Point Plan

1. Replaced them with tamper-resistant caplets (triple safety seal within 6 months)

2. Incentives: free replacement of caplets for capsules, special coupons ($2.50 off) easily obtained

3. New pricing program: discounts up to 25%

4. New advertising program: national 1 minute commercial, News & talk shows,

5. 2250 sales personnel made new presentations to medical stakeholders

• positive press articles regarding J&J, products, & safety• indications of regaining market share• held up as positive example of ethics & responsibility• 450,000 e-mail messages

• Forgiveness: win forgiveness from stakeholders and create acceptance for the crisis

• Sympathy: portray organization as unfair victim of attack by outside persons; willing to accept losses

• Remediation: offer compensation for victims and families (counseling & financial assistance)

• Rectification: take action to reduce recurrence (triple sealed & increased random inspection)

• Effective leadership: clear, visible, consistent role-modeled message from beginning by CEO

Strategies

Most public recovery strategies incorporate the following five components:

Employee Response

• Strong family-oriented culture, “we care about our employees”• Open and current communication with employees; 4 video programs on

the unfolding process• Emphasizing plant workers were innocent• CEO speech in a week to employees, “We’re coming back” (wearing

buttons)• Idle employees given tasks to keep involved & reduce rumoring and

boredom• Indications of market recovery bolster spirits• Congruence and consistency in demonstrating the Credo

Consequences– what was learned

• J&J showed that they were not willing to risk public safety even at excessive cost

• J&J could be trusted all the way to the top– they lived their Credo & having a functional credo worked

• J&J set a new standard for protection thereby requiring competitors to expensively follow suit

• J&J was viewed as a co-victim of the crime• Stakeholder involvement and relationships is essential• One must anticipate and prepared for crises; expect the unexpected• Cynicism: Be aware that 75% of people don’t believe companies take

responsibility for crises or tell the truth• “No matter what you do in the beginning, in the end you will have to tell the

truth”• React fast, openly and decisively

• Report your own bad news– don’t wait for reporters to root it out• Speak with one voice• Gather facts and disseminate from one info center• Be accessible to the media so they won’t go to other sources• Target communications to those most affected by the crisis, and can

affect the media• If you can’t discuss something, explain why• Provide evidence for your statements• Record events via video and documents so you can later present your

side of the story

(learning cont’d)

Copycat tamperings:

• Lipton Cup-A-Soup (1986)

• Exedrin (1986)

• Tylenol again (1986)

• Sudafed (1991)

• Goody's Headache Powder (1992)

“Déjà vu all over again”

Following the Tylenol crisis, several other tamperings plagued other companies. Impact could have been reduced by learning from J&J’s experience.

Virginia Tech ShootingColumbine Shooting

Post-Campus Shooting: Revising the organization

• Assume that your team has been invited to help a small campus of 1000 students recover from a shooting incident (similar to Virginia Tech).

• The school does not have a crisis management team or plan but now recognizes the need

• What are some recommendations you have for them regarding the following:

• How should they go about forming a crisis management team (who should they select and what kind of training might they need)?

• What should they expect as “fall-out” from the crisis (e.g., longer term impact on people and the organization)?

• What can they do to reduce the adverse impact of the crisis on the organization?

• How can the campus be better prepared for crises in the future?