2AgendaWhat 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?
3The Changing Nature of Business Crises 19902001Catastrophes5.5%5.0%Casualty accidents4.8%4.6%Environmental7.8%1.8%Class action2.2%23.1%Consumer action2.8%2.6%Defects/recalls5.4%14.9%Discrimination3.3%2.7%Labor disputes10.3%12.4%White collar crime20.4%Workplace violence3.8%12.3%
4Crisis Survey of Fortune 500 Executives 89% of Fortune 500 execs believe that crises are inevitable today50% of F500 execs do not have a crisis management planOf those who have had a crisis, 42% STILL do not have a plan!yet…97% felt confident that they could respond well to a crisisless than 25% of Global 2000 Enterprises have a business continuity planonly 50% have tested their disaster recovery plansonly 63% of businesses with continuity plans have enterprise wide plansonly 20% of plans are shared with critical third parties
5WTC Business FalloutAn estimated 14,600 businesses inside and around the World Trade Center were impacted by the disaster13.4 million square feet of space in six buildings in and surrounding the WTC complex were destroyed36 miles of new cable had to be installed by Consolidated Edison652 companies occupying 28.6 million square feet of space were temporarily or permanently displaced by the destruction200,000 Verizon Communication lines were knocked out by network failures12,000 Con Edison customers had their power cutIndirect impact to U.S. businesses has been estimated at $151 billion in the first year
6…and the King’s business fares no better… (UK statistics) 90% of businesses that lose data from a disaster shut down within 2 years of the disaster80% of businesses without a well structured recovery plan close within 12 months of flood or fire43% of companies experiencing a disaster never recover50% of a company experiencing a computer outage are forced to close within five years43% of companies that have a business continuity plan do not test it annually80% of companies have not developed CM to provide IT coverage for business continuity25% of financial institutions have no continuity plan40% of companies that have CM plans do not have a team dedicated to disaster recovery58% of UK organizations were disrupted by 9-11, with 13% severely affected
7Early Warning Systems don’t work if you don’t use them Only 23% of businesses have no early warning of some kind; about 75% of crises result from inappropriate action or inaction by top management13 months before the 3-Mile Island disaster a senior engineer warned of the pending accidentEvidence of threats against the US, use of planes as weapons, and infiltration by Islamic terrorists to the US were all known before 9-11Years before Enron collapsed, Arthur Anderson found $51 million of accounting problems in Enron’s booksExecutives Cynthia Cooper of WorldCom and Sherron Watkins of Enron both tried to give warnings of accounting irregularities before the crisisRoger Boisjoly, O-ring engineer for Morton Thiokol warned that there was “blow-by” on the Challenger shuttle O-rings
8When crises occur, they are disruptive When crises occur, they are disruptive. A survey of Fortune 500 execs showed:72% crises escalated72% were subject to close media scrutiny32% received government scrutiny55% interfered with normal business operations52% damaged company bottom line35% damaged company’s reputation & image
9Companies that did not have a crisis plan performed poorly over time
10Companies that have a crisis plan may have an increase in price share after an event
12A survey of Fortune 500 execs showed that 57% had identified warning signs in the previous 12 months, and 38% said it developed into crisisRed flags may includeincreasing 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.
13Survey 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:
14Risk AssessmentTo 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?
15Risk Categorization Hazard Likelihood Hazard Severity You can also categorize types of risks in terms of their impact and probabilityLow ImpactHigh ImpactLow ProbabilityHigh ProbabilityAmber ZoneRed ZoneI I I I I I I I I I I II I I I I I I I I I I IHazard LikelihoodGreen ZoneGray ZoneHazard Severity
16Stages of Crisis Management 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:Fink’s Crisis LifecycleProdromalRisk cues that potential crisis can emergeCrisis breakoutTriggering event with resulting damageChronicLingering effects of crisisResolutionCrisis no longer a concern to stakeholdersMitroff’s Five Stages of Crisis ManagementSignal detectionWarning signs & efforts to preventProbing & preventionSearch risk factors & reduce potential for damageDamage containmentKeep from spreading to uncontaminated areasRecoveryReturn to normal operations asapLearningReview & critique CM efforts for improvements
17Ecomap of Stakeholders 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.Primary EffectSecondary (Vicarious) EffectTertiary Effect
18Crisis Management Team Formation– selling the idea
19Team discussion questions What are the likely objections & barriers to implementing a Crisis Management Team (CMT)?If you were going to prepare an argument promoting a CMT, what are the key points and sequence in your argument?Who in an organization (general positions) should be selected as a CMT member?What are the technical skills and personal qualities that members should have?What training in CM and team process should be required?What are the effects of stress on decision making and what countermeasures should be taken?
20Presenting 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?
21Team Composition: Membership should be based on representation, knowledge, and skill. Key roles:Executive/CEO– responsibility & authorityTeam leader (may be CEO)– keep team updated and focusedSpokesperson– public relations, central source of information, communications, rumor controlLegal representative– legal guidance & implications of actionsResearchers– gather facts & compile information for position statementsTypical team composition:Facility managementLegal departmentRisk managementInformation technologyHuman resourcesFinancial servicesReal estate managementCorporate securityPublic relations/ communications
22Define the duties of the team: Coordinate all crisis related activitiesGathering and reviewing facts of the crisisDetermining crisis response activitiesAllocate resourcesSpecifying internal and external communicationsTraining staffEstablishing working relationships with external stakeholdersMonitor progress and continuing situation assessment
23CM Team Training Team building Acquaintance & awareness of styles Ensure that all CMT members are trained before the crisis occursTeam buildingAcquaintance & awareness of stylesOpenness & trustCohesion, constructive team norms, groupthink countermeasuresUnderstanding of risks & crises, impact & consequences unique to the organization & industryUnderstanding of key crisis concepts and practicesOverview of crisis planning and management process
24Four responsibilities: To the customers To the employees 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 stakeholdersFour responsibilities:To the customersTo the employeesTo the communities they serveTo the stockholders
25Tylenol 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 combinedJ&J was one of the “Best 100” companies to work forTylenol became a product trusted by physicians and families alikeNumerous other Tylenol products were developed for an active marketJ&J strong “family” corporate culture
26The Crisis Begins… Tylenol Case 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 areaCEO James Burke refers to the Credo, alerts to the danger, & assigns team to discover the sourceFormed 7-member strategy teamStop the killingsReasons for the killingsProvide protection & assistance to people
27…and snowballs! Poison Madness in the Midwest --Time Magazine Police drove through streets with loudspeaker warningsChicago hospital received >700 calls in one dayImmediate stories in major magazines and newspapersOver 100,000 separate news stories ran in US papersHundreds of hours of national and local TV coverage>90% of Americans had heard of the Chicago deathsWidest coverage since Kennedy assassination & Viet NamCopycat tampering– 270 reported incidents (36 true)Tylenol, killer or cure?-- Washington PostThe Tylenol Scare--NewsweekJ&J stock fell 7 pointsMarket share dropped from 35% of pain-reliever market to 8%
28Initial Response– Phase 1 Crisis response Immediate alert to consumers not to use any type Tylenol product or resume use until extent determinedLive 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 distributionStrict production, different lot $, & crisis only in Chicago indicated post-production tamperingWithdrew 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 capsulesHigh public profile and repeated reassurance by BurkeWorking relationship with law enforcement agenciesNotification of health professionals nationwide & FDA
29Initial Response—Phase 2, PR Rebound Five-Point PlanReplaced them with tamper-resistant caplets (triple safety seal within 6 months)Incentives: free replacement of caplets for capsules, special coupons ($2.50 off) easily obtainedNew pricing program: discounts up to 25%New advertising program: national 1 minute commercial, News & talk shows,2250 sales personnel made new presentations to medical stakeholderspositive press articles regarding J&J, products, & safetyindications of regaining market shareheld up as positive example of ethics & responsibility450,000 messages
30StrategiesMost public recovery strategies incorporate the following five components:Forgiveness: win forgiveness from stakeholders and create acceptance for the crisisSympathy: portray organization as unfair victim of attack by outside persons; willing to accept lossesRemediation: 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
31Employee ResponseStrong family-oriented culture, “we care about our employees”Open and current communication with employees; 4 video programs on the unfolding processEmphasizing plant workers were innocentCEO speech in a week to employees, “We’re coming back” (wearing buttons)Idle employees given tasks to keep involved & reduce rumoring and boredomIndications of market recovery bolster spiritsCongruence and consistency in demonstrating the Credo
32Consequences– what was learned J&J showed that they were not willing to risk public safety even at excessive costJ&J could be trusted all the way to the top– they lived their Credo & having a functional credo workedJ&J set a new standard for protection thereby requiring competitors to expensively follow suitJ&J was viewed as a co-victim of the crimeStakeholder involvement and relationships is essentialOne must anticipate and prepared for crises; expect the unexpectedCynicism: 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
33(learning cont’d)Report your own bad news– don’t wait for reporters to root it outSpeak with one voiceGather facts and disseminate from one info centerBe accessible to the media so they won’t go to other sourcesTarget communications to those most affected by the crisis, and can affect the mediaIf you can’t discuss something, explain whyProvide evidence for your statementsRecord events via video and documents so you can later present your side of the story
34“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.Copycat tamperings:Lipton Cup-A-Soup (1986)Exedrin (1986)Tylenol again (1986)Sudafed (1991)Goody's Headache Powder (1992)
36Post-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 needWhat 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?