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STRATEGIES FOR BUILDING YOUR COMPANY'S MOST VALUABLE ASSET
By DANIEL DIERMEIER
The McGraw-Hill Companies, Inc.Copyright © 2011Daniel Diermeier
All rights reserved.
THOMAS OFF THE RAILS The Decisive Moment and How to Miss It
As for leadership, I have to hold myself accountable for the positives and negatives. We did a good job managing risk; but we did a less good job managing our reputation.
—Lloyd Blankfein, CEO Goldman Sachs, May 21, 2010
Reputation is to companies what health is to individuals; we may claim that it is our most important possession, but we pay little attention to it until a crisis hits. In this spirit, we will begin our examination with reputational crises. This is the moment when companies must pay attention. Nothing focuses the mind better than a near-death experience.
You have probably never heard of RC2 Corporation, a midsized toy company from the Chicago area. In 2006, RC2 had around $519 million in annual revenue and a little over 800 employees. However, if you have children, you probably know who Thomas the Tank Engine is. Popularized through a well-known children's book series, television shows, the Internet, and toy stores, Thomas and Friends found their way into numerous homes, to the delight of young children everywhere. The talking trains underwent mild adventures that taught them about friendship, telling the truth, and other moral lessons. All was well until the summer of 2007, when Thomas came off the rails.
In June, RC2 voluntarily recalled 1.5 million units of its Thomas the Tank Engine toys (roughly 4 percent of the total it had sold in the United States), reporting that the red and yellow paint used in the factory in China that built the tank engine toys might have been lead-based. Lead-based paint carries serious health risks—especially to young children—including kidney and nerve damage, learning disabilities, attention deficit disorder, and decreased intelligence. These dangers have led to regulatory responses all over the world. The U.S. government, for example, created laws regarding the use of lead paint and the disclosure of possible exposure to it in 1978. Upon learning of RC2's problems, the U.S. Consumer Product Safety Commission issued a stark warning to parents, telling them to "not delay in getting these toys away from their kids." A second recall of five additional Thomas and Friends products two months later that affected 200,000 units did not help matters.
Despite similar problems across the industry, RC2 paid a particularly severe economic price for the recall. Three years to the day after the announcement of the recall, the company's stock price was still down by 60 percent.
Recalls need not always have such a lasting negative impact, as demonstrated by the classic Tylenol crisis. In the fall of 1982, seven Chicago-area residents died after taking Tylenol, which at the time was the leading over-the-counter painkiller. Tylenol had a market share of about 37 percent at the time, more than its next three competitors combined, and accounted for approximately 8 percent of Johnson & Johnson's total sales and 19 percent of its corporate profits.
Police investigators quickly concluded that an unknown suspect had taken at least three bottles of Tylenol capsules from stores, laced them with cyanide, and returned them to store shelves, a fairly easy task in a time before the innovation of tamper-proof containers. Indeed, the Tylenol crisis led directly to the development of tamper-proofing. The incident created tremendous media interest, generating more than 125,000 stories, at the time making it the most documented media event since the assassination of John F. Kennedy.
The discovery prompted Johnson & Johnson to issue a nationwide recall of Tylenol products on October 5, 1982, five days after the deaths became known. The company assisted health departments with nationwide public service advertisements warning against consuming Tylenol capsules, and created a toll-free hotline. In addition to recalling more than 31 million bottles of Tylenol capsules, Johnson & Johnson offered to exchange tablets for all Tylenol capsules already purchased.
The immediate cost of the recall topped $100 million, while estimates of the total cost of the crisis—which included temporarily depressed sales and the short-term loss of the company's liability insurance—range from $500 million to more than $1 billion. Throughout the crisis, Johnson & Johnson CEO James E. Burke served as the voice of the company. A month later, he introduced the tamper-resistant packaging at a press conference that was covered live by satellite. The new packages would have three modifications: glue-sealed boxes, a plastic seal over the neck of the bottle, and a foil seal over the opening.
These examples suggest that the important issue is not just whether a crisis occurs, but how it is managed: for every Thomas, there is a Tylenol. Understanding the sometimes subtle differences between effective and ineffective management of reputational crises is critical.
THE DECISIVE MOMENT
We make our first mistake in the very way that we think about crises. Intuitively, we characterize them as purely negative events. Terms like damage, stress, pressure, and disaster naturally come to mind. Instead, we should recognize that how we conceptualize a problem determines what counts as a good solution. If we face a potential catastrophe, walking away with merely a black eye or avoiding getting hit by the bus surely looks like a good outcome. If we think only about damage, then damage control is the best we can hope for; all these expressions suggest a defensive attitude. The important but unstated assumption is that the best one can hope for is to get as close as possible to the precrisis state.
Suppose we have some measure of performance, as expressed by the wavy line in Figure 1-1. This can represent a company's stock price, its revenue, its market share, or any other operative measure. Now, assume that a crisis hits that leads to a collapse in that measure. A damage control approach will then try to get as close as possible to the precrisis state.
However, crises almost always present opportunities as well, sometimes significant ones. In other words, the postcrisis state can be better than the precrisis situation, as pictured in Figure 1-2.
According to this approach, we can conceptualize crises as decisive moments, turning points for better or for worse.
What distinguishes a crisis from a particularly bad day at the office or any other important decision? What makes the moment truly "decisive"? And why are the stakes so high? Various answers come to mind. Crises frequently happen without warning and under extreme time pressure. Decision makers drown in information overload, yet truly vital information is not available.
All this is true, but in the case of reputational crises, there is another issue, and one that is frequently overlooked. In a crisis, people are paying attention; it is as if the company is on stage, the lights are bright, and everybody is looking at management's next move. Among those who are paying particularly close attention are customers (as in the case of lead paint in toys), employees (as in sexual harassment lawsuits), investors, suppliers, and other business partners, and also third parties such as competitors, advocacy groups, politicians, and regulators. There is hardly ever a crisis without the media lighting the stage, and once there is a stage, jumping onto it may prove irresistible for anyone with an agenda and a desire for attention.
When people pay attention, they remember, sometimes for a very long time. The case of Thomas the Tank Engine is already a few years old, but the company has no
Excerpted from REPUTATION RULES by DANIEL DIERMEIER. Copyright © 2011 by Daniel Diermeier. Excerpted by permission of The McGraw-Hill Companies, Inc..
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