Day 3: Case Study Practice

15. Korudo Appliances 

Korudo Appliances manufactures large home appliances, and the brand is best known for its washing machines and dryers. Korudo recently went into crisis management mode upon the news that a new Korudo dryer had caught fire in a university dormitory. There were no deaths, but several students were taken to the hospital, and the building was nearly destroyed. Initial news reports suggested that a defect in the Korudo dryer was to blame, though company engineers and maintenance specialists told CEO Mila Novak that they thought that user error was the cause. The most common dryer fires occur when users do not properly clean the lint out of the machines. Four hours after the first news reports, Mila directed Korudo's public relations team to issue a press release announcing that while it was "very unlikely to have been caused by faulty equipment," they were in contact with local university and fire department officials and would immediately launch an investigation of their dryers.  Mila declined all requests for televised interviews, instead continuing to release statements that a fully transparent investigation, led by the company but also involving government inspectors, had so far given no indication that it was unsafe to use the commercial-sized dryer involved in the incident. The company's share price nonetheless dropped 15% during the first few days of the crisis. A week later, a fire in a Korudo oven started in a family's home, resulting in two deaths. News media suggested that Korudo had faulty equipment, and again the company engineers assured Mila that there was no indication that a faulty oven would have caused it. 

Upon consulting the company's public relations manager, Mila scheduled an interview with a major TV news outlet the day after the house fire and caught an immediate flight to the factory that produced the dryer model involved in the dormitory fire. Cameras followed the factory tour as Mila explained to the reporter the immediate and thorough efforts that the company had been taking to ensure that nothing was faulty with its equipment. After the interview, the Korudo share price rose five percent. Mila is considering offering to pay for the damage to the university and the home, as well as to cover the funeral costs of the victims, despite her belief that Korudo is not at fault.

Questions:

A. With reference to Korudo, explain what is meant by crisis management. [4]

B. Explain why transparency and communication are important to Korudo in this crisis. [2]   

C. Explain two ways in which a contingency plan could help Korudo to deal with a crisis such as the one shown in this case study. [4] 

D. To what extent are Korudo's actions appropriate in handling the crisis situation? [10]

16. Ferdinand's Ice Cream & Hot Fries 

 Ferdinand's Ice Cream & Hot Fries is a nationwide chain of shops that sells ice cream and gourmet french fries. Ferdinand's has strict quality control procedures in place at its four factories, and it has agreements with its supplying dairy farmers that allows the company to conduct inspections. The company has several contingency plans for how to deal with potential product quality and safety issues that may arise in their supply chain; for instance, plans vary depending on whether a food safety issue originates with a supplier, at a company factory, or at a Ferdinand's ice cream shop.

Some middle managers at their plants have also been advocating for developing contingency plans for a major power outage at one of its factories, an idea that management has not implemented due to the perception of such an event being very unlikely to happen or to last very long. Ferdinand's operates in a highly economically developed country, and its factories are in areas in which large natural disasters are not common, though brief power outages have happened during heavy rain storms. The chief operating officer believes that any event significant enough to affect a factory's power for more than 12 hours would also shut down its local suppliers as well, and that there would be so many uncertain variables in such an event that a contingency plan developed in advance may prove unhelpful.

Upper management believes that in order to be guaranteed to not lose power if the local power grid temporarily goes down, they would need to invest millions of dollars into backup electricity generators and have ongoing costs of keeping the generators in good working condition. One vice president has a gasoline (petrol) powered electricity generator for home use but then found it was useless when his home lost electricity because he had not turned it on in several years and did not realize that the machine had needed periodic maintenance. Ferdinand's already has a few generators to keep some of its cold storage running, but not its production lines. Another option would be to install solar panels, which would also lower the company's energy costs in the long run; however, the initial investment in these would be very large and could have a payback period of as many as 15 years. These two options though have not gone through any official review.

The company does not list power loss as a risk factor in its annual shareholder reports. Some shareholders are beginning to question this omission though, noting that global climate change is leading to severe weather events and wildfires that are less predictable, affect more locations, and do more damage. 

Questions 

A. With reference to Ferdinand's, explain the differences between crisis management and contingency planning. [4] 

B. Explain why the speed of action and communication would be important to Ferdinand's if there were a food safety crisis in its supply chain. [4]  

C. With reference to Ferdinand's, outline one common element of a contingency plan. [2]  

D. Explain a benefit and a drawback to Ferdinand's developing a contingency plan for power loss. [4] 

E. Discuss the merits of Ferdinand's developing sources of backup power generation for use in a major power outage. [10]

What you should know 

By the end of this subtopic, you should be able to:

• define the following terms: (AO1)

  • crisis management

  • contingency plan

• distinguish between crisis management and contingency planning (AO2)

• analyse the factors that affect effective crisis management, including: (AO2)

  • transparency

  • communication

  • speed

  • control

• examine the impact of contingency planning for a given organisation or situation in terms of: (AO3)

  • cost

  • time

  • risk

  • safety

https://quizlet.com/pa/836574200/57-crisis-management-contingency-planning-hl-flash-cards/?i=4jrhob&x=1jqt

https://www.gimkit.com/view/65372cabbdf7ba002b5ebe78 

Communication

One of the factors that affects the effectiveness of crisis management, about informing internal and external stakeholders to help them to know and understand the issue.

Contingency planning

The management process of devising and developing pre-arranged plans to deal with a crisis, in case it actually occurs.

Control

One of the factors that affects the effectiveness of crisis management, about using a crisis management team to handle a crisis and ensure there is leadership and governance.

Crisis

Any unpredicted event that has widespread negative consequences, causing major disruptions to the normal operations of an organization.

Crisis management

The management process of responding to an actual crisis facing an organization.

Quantifiable risks

These are measurable threats to the operations of a business so are insurable risks, e.g., the probability of fire to the premises or theft of the firm’s inventories (stocks).

Speed

One of the factors that affects the effectiveness of crisis management, about making prompt decisions and actions in order to return to the business to its normal operations as soon as possible.

Spokesperson

A representative of the organization appointed to handle the communications with key stakeholder groups should a crisis occur.

Transparency

One of the factors that affects the effectiveness of crisis management, about being open and honest with all stakeholders during a crisis. It is about disclosing the truth, such as the scale or severity of the crisis.

Unquantifiable risks

These are immeasurable and unpredictable threats to the operations of a business, so are uninsurable risks, e.g., the COVID-19 pandemic.

Crisis Management is about the response a business takes in the event of an actual threat, disaster or crisis. It is about the way in which a business reacts during a real crisis. This is particularly important if the crisis is major enough to threaten the survival of the business.

Examples of crisis management situations and how they were handled:

1. BP Deepwater Horizon Oil Spill: This environmental disaster in 2010 had severe consequences. BP faced immense public outrage and legal challenges. They responded with a massive cleanup effort, financial compensation for affected parties, and changes in safety protocols.

2. United Airlines Passenger Removal Incident: When a passenger was forcibly removed from a United Airlines flight in 2017, it was captured on video and went viral. United Airlines faced backlash but later revamped its policies and offered a settlement to the passenger.

3. Volkswagen Emissions Scandal: Volkswagen faced a crisis when it was revealed they had manipulated emissions tests in their vehicles. The company apologized, paid significant fines, and started a shift towards electric vehicles to regain trust.

4. Starbucks Crisis Response: Starbucks is an example of proactive crisis management. In response to an incident involving racial bias in one of their stores, they closed thousands of stores for racial bias training and publicly apologized, showing a commitment to addressing the issue.

These examples illustrate the importance of swift, transparent, and responsible crisis management strategies in maintaining a brand's integrity and public trust.

Sources:

1. BP Deepwater Horizon Oil Spill

2. United Airlines Passenger Removal Incident

3. Volkswagen Emissions Scandal

4. Starbucks Crisis Response

1.  Transparency

2.  Communication

3.  Speed

4.  Control

Summary:

1. Transparency - Being open and honest about what is happening. Tell the truth even if it's bad news. This helps build trust. People understand mistakes happen. Hiding things makes them less forgiving.

2. Communication - Talk to employees, customers and others. Explain what is happening and what you are doing. This helps people understand and support you through the difficult time. It prevents rumors and keeps everyone working together.

3. Speed - Act fast to solve problems. Have a plan ready to use right away. Quick decisions contain the situation and limit damage. Moving quickly also stops false stories from spreading on social media.

4. Control - Take charge and lead the response. Have one team in charge of coordinating everything. Practice emergency plans to be prepared. Leading strongly reassures people and gets the situation under control.

Working on all four areas helps manage a crisis better. Being transparent, communicating well, acting fast, and taking control of the response helps solve issues and return to normal business more quickly. 

Detailed:

1.  Transparency

Transparency is about being open and honest with all stakeholders during a crisis. It is about disclosing the truth, such as the scale or severity of the crisis situation. People are far more receptive to bad news and are more forgiving during a time of crisis, especially if the crisis was beyond the organization’s control. However, people do not like to be lied to. They are far less sympathetic if important information is discovered at a later time; hiding the truth from the media is particularly not well received!

Stakeholders want the business to act responsibly before, during and after a crisis. As part of its corporate social responsibilities (CSR), the business will need to remain transparent, not just in communicating about the crisis, but keeping stakeholders informed about its recovery plan. Workers, for example, will want to know that they still have their jobs or that it is safe for them to return to work.

In the case of the Volkswagen diesel scandal (see case study below), the carmaker initially tried to hide their unethical business practices, resulting in an unfavourable court hearing in the USA. Had the company communicated in a transparent way, the severity of the crisis would not have been prolonged, nor would it have cost the company so much money. Essentially, transparency can help an organization to maintain its integrity and uphold its corporate image.

2.  Communication

"The single biggest problem in communication is the illusion that it has taken place"
- George Bernard Shaw (1856 - 1950), Irish playwright

Effective communication is vital during a time of crisis. Internal communication with employees will help them to know and understand the issue, and the course of action for business continuity and the role that workers play in this. External communication is equally important as customers, suppliers and the general public are more likely to be understanding, sympathetic and supportive if they know what is going on. Insurance companies will also need to be clearly communicated with if they are to compensate the insured business for damages incurred.

Clear and open communication can therefore help a business to earn support and goodwill from internal and external stakeholders at a time when it is needed the most. A business that chooses not to communicate with its stakeholders risks a public relations disaster (see above case study about VW’s car emissions scandal). In the worst case scenario, a lack of open communication, in an attempt to hide the scale of a crisis, risks damaging the reputation of the business beyond repair. By contrast, effective and honest communication can win the support of the mass media and general public.

Of course, it is not always necessary to communicate with the general public about a crisis. The business needs to consider which stakeholders are the most important ones that need to know, although all responses and reaction to the crisis must be done so in a socially responsible manner.

Effective communication is vital during a crisis

3.  Speed

The purpose of crisis management is to return to the business to its normal operations as soon as possible. Hence, a speedy response is needed during a crisis in order to contain the situation and to keep people safe. Decisive actions are easier to take if the business has an effective contingency plan that can be implemented. Prompt action includes communications with all stakeholders (see above), perhaps through a staff meeting or press conference.

Business continuity becomes far less of an issue if the organization has an effective contingency plan to act in a swift way. Speed can also prevent a heavily biased or false version of the crisis being reported on social media or through other means, which could potentially worsen the problems.

By contrast, a slow response can easily prolong or even worsen the crisis. However, a rushed decision will not always be the best one, which is why contingency plans are important.

4.  Control

Some crises can be preventable, such as improved health and safety practices in the workplace to prevent major accidents and fires. Improved security measures can prevent loss of stock and other valuable assets. Many businesses use a crisis management team to handle a crisis situation and ensure there is effective control. Taking control of a crisis situation is essential to prevent the matter worsening or damaging news being spread beyond control via social media and other channels of communication.

Fire drills allow firms to take control in a real emergency

A crisis will typically require clear leadership, so senior executives will adopt an autocratic leadership to take effective control of the situation. Autocratic leaders are decisive decision makers, which can also help to reassure and motivate employees. Taking control prevents further damage being done, so helps to keep the situation under control as far as possible.

In summary, a transparent and speedy response, backed by honest communications, allows a business to take better control of a crisis situation. The combination of these four factors enables a business to stand a greater chance of returning to normality.

Contingency Planning is about devising and developing pre-arranged plans to deal with a crisis, in case it actually occurs.  It involves the use of risk assessments in order to be better prepared for a crisis, such as a fire, should it ever happen. Consists of "what if" scenarios in order to have plans to minimize the impact of a real crisis, should it ever occur. Allows people to know what to do in an emergency

Examples:

• Fire drills

• School lockdown procedures

• Theatre backup plan in case main actor gets sick before a performance

• Government plans for tsunamis, earthquakes, threats of national security

Avoid writing circular definitions ...

Too often, candidates write circular answer (or circular definitions) in the exams. What this means it that they repeat the question in the answer/definition, which cannot be rewarded. For example, consider the exam question and responses below.

Define the term crisis management.  [2 marks]

A poor response is one that repeats the question, such as:

"Crisis management means managing a crisis."

Whilst this is not entirely wrong(!) it doesn't show any real understanding of the term.

A better response would be something like this:

"Crisis management is the process by which an organization handles an unexpected event that is highly disruptive to to its operations or even threatens the organization or its stakeholder groups."

Try not to use or repeat the key term ("crisis management" in this case) in your definitions.

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5.7 Case Study Questions

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5.7 Case Study Answers

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