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CHAPTER 1

A Framework for Crisis Management

Visualizing Crisis Management

Visualize the term crisis management, and a number of images may pop into your head. Consider these possibilities:

■ Maybe you thought of a recent YouTube video of two Domino’s Pizza employees, one of whom put cheese up his nose and then placed it on a sandwich. The video received nearly one million views on YouTube before it was removed (Beaubien, 2009).

■ Perhaps you remembered stories about numerous outbreaks of violent weather, particularly tornadoes that have hit the Midwest and southern portions of the United States in recent years. These weather patterns were not only sudden, but were catastrophic the physical and human damage they inflicted.

■ On a broader level, you might have envisioned a team of managers trying to deal with a fire that has destroyed part of the production facilities at their manufacturing plant. Indeed, fires remain one of the most prominent types of crises that managers must address.

■ You might have thought of the tsunami that hit Japan in 2011, causing widespread death, destruction, and the interruption of global supply chains. This event was further complicated by the spread of nuclear fallout in the air and water.

Indeed, the term crisis management invokes a number of images in the mind of the reader. However, crisis management is not just a one-time response to an unfortunate event. It is much broader than that. We view it as a strategic process that must occur far before the first crisis ever takes place in the life of the organiza- tion. It is a process that must be planned both before and after the crisis occurs.

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2 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

When we view crisis management as a holistic process, a conceptual framework must be developed to understand how this process should be organized. A frame- work functions as a map that helps us see how the different parts of a process are interrelated. This book offers a framework to help you understand the field of crisis management and how you can better prepare for crisis events that may occur in your organization.

The onset of crises in organizations is a common occurrence in our contempo- rary environment. And yet many people associate a crisis with a highly dramatic event that produces mass destruction and even causalities. Most organizational crises are far less dramatic but can still have a substantial negative impact on the firm. The problem with associating only catastrophic events with a crisis is that they sound so dramatic that most organizational leaders may assume an “It can’t happen to us” mentality. But then, consider these crises that are still damaging, yet less prominent:

■ In January 2012, Coca-Cola Company encountered a problem with its orange juice products, Simply Orange and Minute Maid. Some of the prod- ucts sold in the United States contained small amounts of carbendazim, an unapproved fungicide used with oranges from Brazil. Although the fungi- cide is approved in that country, it is not in the United States, prompting Coca-Cola to move into crisis management mode (Kiernan & McKay, 2012).

■ General Motors (GM) faced a setback in late 2011 when its electricity-propelled Chevy Volt performed poorly in three crash tests that resulted in fires or sparks from the vehicle’s battery pack. GM, realizing it was facing a crisis, offered loaner cars to any of the 6,000 Chevy Volt owners while engineers worked to fix the problem (Terlep, 2011).

■ In 2008, a now-infamous online advertisement by Johnson & Johnson (J&J) promoting its pain reliever, Motrin, met resistance from young mothers. The ad stated that mothers who carry their babies in a sling are making a “fashion statement,” something that many of the moms found offen- sive (Wheaton, 2008). Johnson & Johnson quickly pulled the ad from the Internet.

As these examples illustrate, not every organizational crisis is dramatic, but each one can have a far-reaching impact if it is not managed properly.

Setting the Context

Unfortunate events will occur in the life of most organizations. We refer to these events as crises . There are two broad approaches to the managing of these events: (1) Try to keep them from occurring in the first place, and (2) mitigate or soften the impact of the crisis when it does occur. Crisis management is the discipline that addresses these two approaches.

Crisis management is a field of growing interest because many managers now realize that their firms are not immune to those sudden, unexpected events that can

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Chapter 1. A Framework for Crisis Management 3

put an organization into a tailspin, and sometimes even out of business. This book is written for managers and students of crisis management. As present or future leaders in your organizations, the key issue you will face is not whether a crisis will occur, but when, and what type. As a result, an understanding of crisis management is an essential part of your toolkit for organizational and professional success.

Developing a Framework for Studying Crisis Management

A starting point for understanding crisis management is to view it in terms of a framework. Frameworks group or organize what we experience in organizational life. In this book, we develop a framework that looks at crisis management in four distinct phases. In addition, each phase is divided into its internal and external dimensions, a distinction we call landscapes . Our framework begins with a defini- tion of the term, presented in the next section.

Definition of Crisis

The word crisis has been used interchangeably with a number of other terms, including disaster, business interruption, catastrophe, emergency, or contingency (Herbane, 2010). Hence, the definition of a crisis must be established before a suit- able framework can be developed. Numerous definitions have been offered, and most synthesize previous definitions to some extent. Pearson and Clair (1998) have offered the most widely used definition of an organizational crisis:

An organizational crisis is a low-probability, high-impact event that threatens the viability of the organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as by a belief that decisions must be made swiftly. (p. 60)

The following implications of this definition should be highlighted:

■ A crisis is a “low-probability” event. This characteristic makes the planning for a crisis even more troublesome. Events that are not perceived to be immi- nent are hard to plan for. In addition, it is often difficult for management to find the motivation to plan for such an event. The notion is, “Why plan for something bad if it may not occur?” (Spillan & Crandall, 2002). Many managers have asked that same question until they were confronted with a major crisis.

■ A crisis can have a high-damage impact. A crisis can devastate an organiza- tion, even kill it, or at best, leave it badly wounded.

■ The reference to “ambiguity of cause” means that the origins and effects of the crisis might not be known initially. As humans, we instinctively like to point to simple causes. We especially seek to look for human stakeholders

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4 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

such as management or company owners who might have contributed to negligence, ultimately causing a crisis. However, as we will see throughout this book, multiple interrelated factors can lead to a certain trigger event that can initiate a crisis.

■ The ambiguity in this definition also implies that the means of resolving the crisis are often debatable. In other words, several viable options may be available for the crisis management team to use in its goal of mitigating the crisis.

■ Certain aspects of managing a crisis may require swift decision making. The failure to act decisively during the acute stage of the crisis can often intensify the ordeal.

All of these definitions provide a starting point for understanding crisis manage- ment. As more understanding of crisis management has emerged, more contempo- rary ideas and interpretations of crisis and crisis management have been developed.

Timothy Coombs’s (2007) has developed one of the most recent conceptualiza- tions of a crisis:

A crisis is the perception of an unpredictable event that threatens important expectancies of stakeholders and can seriously impact an organization’s per- formance and generate negative outcomes. (pp. 2–3)

This definition emphasizes perception. A crisis is generally perceived to be a threat by the organization’s stakeholders, various groups that have an interest in the organization. Employees, customers, and the community in which the organization resides are considered stakeholders. Coombs infers that not all stakeholders will perceive that a crisis is occurring. A product defect that is detected by consumers, but not individuals inside the company, is an example of the incongruity that can take place. Nonetheless, a crisis has occurred, because the perceptions of at least one group of stakeholders have been affected in a negative manner by the event. Recognizing this distinction is important because there are occasions when man- agement has gone into denial, proclaiming that no crisis has occurred (or could ever occur, for that matter), when in fact one has transpired (Sheaffer & Mano- Negrin, 2003). Textbooks are full of examples of this type of denial, such as General Motors’ denial that anything was wrong with its Corvair automobile (Nader, 1965). In this early 1960s example of a corporate crisis, consumers and the media claimed that the Corvair automobile was subject to instability when going into a turn. Indeed, several accidents involving fatalities had occurred as a result of this structural problem. GM maintained that the problem of instability was caused by driver error, not a defect in the car. This denial by GM that a crisis existed resulted in a huge public image problem for the company.

This book follows these crisis definition guidelines. We build on the definition offered by Pearson and Clair in 1998 (which is the most frequently cited in the crisis management literature), but we also include the perspective offered by Coombs. To paraphrase Pearson, Clair, and Coombs, we offer the following definition to serve as our reference point throughout the book:

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Chapter 1. A Framework for Crisis Management 5

A crisis is an event that has a low probability of occurring, but should it occur, can have a vastly negative impact on the organization. The causes of the cri- sis, as well as the means to resolve it, may not be readily clear; nonetheless, its resolution should be approached as quickly as possible. Finally, the crisis impact may not be initially obvious to all of the relevant stakeholders of the organization.

One characteristic of a crisis that should be mentioned is this: they rarely occur without warning. Instead, a number of preconditions usually exist that breed a crisis. Put differently, crises have life cycles, and understanding what occurs before a crisis commences is important to helping prevent it.

The Life Cycle of a Crisis

Researchers usually examine a crisis in a sequential manner to better understand its evolution. One approach is to look at a crisis in four stages: preconditions, the trigger event, the crisis itself, and the postcrisis.

1. Preconditions. Smith (1990) was one of the first to point out that a set of smaller events typically interact before a crisis occurs. This combination of events eventually leads to a significant occurrence, commonly called the “trigger event” (Roux-Dufort, 2009; Smith, 1990), which causes the crisis to commence. For exam- ple, the trigger event at Union Carbide’s Bhopal India plant in 1984 was the entry of water into a gas storage tank that subsequently caused the unit’s temperature to rise. The resulting pressure increase forced the dangerous gas methyl isocyanate (MIC) to escape, resulting in the deaths of thousands of innocent civilians. However, responsibility for the crisis cannot be attributed solely to those involved with that step in the crisis because numerous preconditions contributed to the origin of the accident. These included shutting down a refrigeration system, failing to reset the tank temperature alarm, the nonfunctioning gas scrubber, and an inoperative flame tower designed to burn off toxic gases (Hartley, 1993).

2. Trigger event. The trigger event is the point at which the crisis escalates and upsets the normal equilibrium of the organization. The firm has been function- ing normally up to this point, but preconditions brewing “beneath the surface” have been leading up to the trigger event, ultimately setting the crisis in motion and making it noticeable to the key stakeholders of the organization. Some might equate it to the point “where all hell breaks loose” or “the straw that broke the camel’s back” (Crandall, 2007).

3. Crisis . The escalation of the crisis produces the greatest damage to the organization and its stakeholders. Potential stakeholders include employees, man- agement, owners or stockholders, customers, those who use social media outlets, suppliers, the local community, and government regulators. Damage can be exten- sive during this acute stage of the crisis and can have a major effect on the business or organization’s continuity.

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6 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

4. Postcrisis. When the acute phase of the crisis is over, management should reflect on the event and glean lessons on what changes need to be made to pre- vent future crisis events (Kovoor-Misra and Nathan, 2000; Smith & Elliott, 2007). For example, after the first cyanide poisoning in 1982 of extra-strength Tylenol, Johnson & Johnson switched to a tamper-proof container. After the second poison- ing in 1986, J&J made additional changes and manufactured the product as a caplet, a nonpenetrable material that cannot be adulterated by cyanide.

Strategic Orientation

In many instances, crisis events in organizations are addressed with a short-term, reactive perspective. When a crisis occurs, select individuals in an organization— perhaps those on an established crisis management team—convene to minimize the damage and present a positive image to the public. Any preparations for dealing with such crises often focus on effective communications and public relations. In con- trast, organizations continually face strategic challenges. They must adapt to their changing business environments and modify their strategies to survive and remain competitive. In doing so, their managers tend to adopt a long-term perspective on strategic planning.

Between the extremes of an organizational crisis and a strategic challenge are obstacles to organizational success that are not always easy to classify. Indeed, distinguishing between a crisis and a strategic challenge may be difficult. Consider these potential scenarios, all of which are based on a number of events that have occurred over the past several years:

■ A supplier in another country produces a product that turns out to be defective and the product is assembled as a component into a domestically manu- factured product. The final product fails, and in the process, kills three people. Is this a crisis or a strategic challenge? The answer is both. It is a crisis because there has been a loss of life because of a defective product. It is a strategic challenge because the supplier might have been selected solely for its ability to manufacture the component product at a low cost.

■ A labor union stages a mass boycott of certain products that are sold by domestic companies but manufactured overseas. The message from the protest is that these products have caused the loss of domestic jobs. The boycott causes some revenue loss for the companies that manufacture and retail these products. In a few cases, vandalism occurs on retail store properties that offer the products. Is this a crisis or a strategic challenge? Again, it is both. It is a crisis because of the sudden and unexpected loss of revenue for the companies involved. Furthermore, the damage and public apathy is of concern because it requires swift and effective decision making to ease the problem. It is a strategic challenge because the products are made overseas for cost reasons.

■ A major pharmaceutical company begins a program for the expansion of products that involves addressing health needs for baby boomers, a market that is seen as a major revenue source in the years to come. Several new drugs are approved

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Chapter 1. A Framework for Crisis Management 7

and introduced to the market. After a few years, however, one of the drugs is linked to a deadly heart disease. Pressure to withdraw the drug is put firmly on the phar- maceutical company. Is this a crisis or a strategic challenge? Once again, it is both. It is a crisis because stakeholder attention is questioning the credibility of the drug and, indirectly, the credibility of the company. A major repercussion could result from this event, and swift decisions are required. And it is a strategic challenge because the drug was in the firm’s long-term arsenal of products that would be popular and viable over the next 20 years.

■ A major corporation establishes a compensation plan for its management staff that rewards them on the basis of performance. As hoped, performance indi- cators begin to look good in certain areas of the company, despite the fact that the local economy has been faltering. For seven quarters, two managers receive bonuses based on meeting the performance indices established under the compensation plan. Unfortunately, it is discovered later that both managers have been “cooking the books.” They are eventually fired, and the company is fined. During the ordeal, the company receives negative press because of the “unethical acts of its managers.” Is this a crisis or a strategic challenge? Of course, this answer is both. The crisis aspect was mani- fested by the reputational and financial damage the company suffered. This dilemma also has roots as a strategic challenge. The decision to set up a bonus plan based on performance was, in itself, not a poor decision. Indeed, most managers in both service and manufacturing industries are compensated in part on the basis of performance. However, some plans are set up in such a way that they can invite unethical decisions on the part of management.

Because of crises’ link with strategic challenges, planning for them should be a part of the strategic management process. While traditional crisis management approaches view this function as a separate planning process, crisis planning should not exist in a vacuum but should intertwine with strategic planning. This theme is developed throughout the book.

Previous Crisis Management Frameworks: Classifications of Crises

Some of the earlier frameworks looked at types of crises. In their work on pre- senting corporate policy during a crisis, Marcus and Goodman (1991) identified three types of crises: accidents, product safety and health incidents, and scandals. Pearson and Mitroff ’s (1993) framework identified seven crisis families: economic attacks, environmental accidents, occupational health diseases, psycho events (e.g., terrorism, sabotage, product tampering), damage to reputation, informational attacks, and breaks (e.g., recalls, product defects, computer breakdowns). In a similar crisis family arrangement, Myers (1993) offered a framework of crises con- sisting of natural disasters (floods, hurricanes, etc.), environmental events (aircraft accidents, contamination events, explosions), and incited incidents (arson, sabo- tage, vandalism). Crandall, McCartney, and Ziemnowicz (1999) used a five-family crises framework in their study of internal auditors. Specifically, they identified

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8 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

crises in terms of operational problems, negative publicity events, fraudulent crises, natural disasters, and legal issues.

Coombs (2006) has offered this more recent framework and classified crises as follows:

■ When an organization is attacked: Computer hacking or tampering, rumors, product tampering, workplace violence, and terrorism. The common theme is that the attacks originate from outside the organization. However, that is not to say that all attacks are externally generated. Certainly a disgruntled employee can cause an attack as well, particularly in relation to a workplace violence episode.

■ When things go bad: Defective products caused by company error, loss of key personnel, industrial accidents, transportation problems, and stakeholder chal- lenges (when an outside group accuses the company of wrongdoing). Often these types of crises arise because of operational problems in the company.

■ When the organization misbehaves: Not addressing known risks, improper job performance that leads to an accident, legal and regulatory violations. The common theme is that an ethical breach has occurred.

Another framework is worth mentioning, especially in light of the 2007 Virginia Tech massacre incident when a student, Seung-Hui Cho, went on a shooting ram- page and killed 32 people. Prior to this incident, Mitroff, Diamond, and Alpaslan (2006) had completed their own assessment of crises categories that could occur on an American college or university campus. Their framework consisted of crimi- nal activities, informational crises (identity theft, fraud, confidentiality problems), building safety issues, athletic scandals, public health problems (such as a disease outbreak or food safety problem), unethical behavior or misconduct (plagiarism, record tampering, or fraud), financial crises, natural disasters, legal or labor dis- putes, and reputation problems. While such a framework may seem like just a list, it is important to note that crises tend to reside in common families or categories.

Using a framework for classifying crisis events into families is a useful way to organize what we experience. Mitroff (1989) was one of the first crisis management researchers to note that while it is impossible to prepare for every type of crisis that might happen to an organization, preparing for a few families of crises is feasible. In this book, we present a framework of crisis families that takes into account the internal and external landscapes of the organization’s environment. But first we need to acknowledge that crisis events occur in stages.

Previous Crisis Management Frameworks: Stages of Crises

Frameworks have also been developed that account for the various stages of a crisis. The more familiar frameworks emerged in the 1990s and generally followed a three- or four-stage approach to analyzing the life of a crisis. Crisis researchers realized that analyzing the stages of a crisis led to a more thorough understanding of the crisis phenomenon. A crisis was more than just an event. It was a life cycle phenomenon that had a birth, an acute stage—the crisis—and an aftermath, a time of learning and reflection. Table 1.1 provides an overview of the various frameworks that are discussed next.

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F O S T E R , C E D R I C 1 6 9 2 T S

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10 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

Three-Stage Frameworks

The most basic framework is the simple three-stage approach that follows a precrisis, crisis, and postcrisis format. Smith (1990) offered a three-stage format consisting of a precrisis period, the crisis of management; a crisis period, the opera- tional crisis; and a postcrisis stage, the crisis of legitimation. The crisis of manage- ment stage held that the actions of organizational leaders—plus a culture that does not put a premium on preparedness—can lead to a climate in which all that is needed is a trigger event to start the crisis. Once the crisis is under way, the organi- zation manages the crisis as best it can during the operational crisis stage. This stage is characterized by building a supportive climate among the key players involved in the crisis. Unfortunately, the crisis of legitimation stage may be characterized by scapegoating on the part of a number of parties, including the organization itself as well as the government and the media. The scapegoating process involves appor- tioning blame for the crisis to various stakeholders.

Richardson (1994) offered a three-step framework similar to the one proposed by Smith. The precrisis/disaster phase focuses on prevention by addressing the threats that can cause a crisis. The crisis impact/rescue stage is the occurrence of the crisis. During this period, management should seek to mitigate the crisis and offer support to those affected by it. The recovery/demise stage involves restoring stakeholder confidence in the organization.

Four-Stage Frameworks

By adding an additional stage, the four-stage frameworks offer a more precise approach. Myers (1993) offered a four-stage approach that begins with the normal operations stage, a time when prevention practices are established. In this stage, operations are normal, but preparations are made to address a crisis event should one occur. The second stage, emergency response, encompasses the activities dur- ing the first hours following the onset of the crisis. Interim processing, the third stage, represents an intermediate phase when temporary procedures are set up until normal operations can resume. Restoration, the final stage, focuses on the organiza- tion’s transition back to normal operations.

Fink (1996) also offered a four-stage framework beginning with the prodromal stage. This stage occurs before the full-blown crisis and contains warning signs that signal a crisis may be imminent. In this stage, it is possible to prevent the crisis if the warning signs are heeded. The acute crisis stage follows next and is evidenced by the sudden onset of the event. The crisis is most noticeable by outsiders at this stage. The chronic crisis stage is less dramatic in appearance but is still significant because the organization is attempting to address the lingering damages from the episode. The final stage is the resolution stage, when the organization is returning to its precrisis existence.

Five-Stage Framework

Unlike the four-stage frameworks, Pearson and Mitroff ’s (1993) five-stage framework provides an even more comprehensive approach to understanding the stages of a crisis. These stages include:

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Chapter 1. A Framework for Crisis Management 11

1. Signal detection. The occurrence of a crisis always begins with some forms of warning. Signal detection is the stage that advances those warnings. Becoming adept at signal detection is a mind-set, as well as a skill, that organizations need to embrace.

2. Preparation/prevention. This stage involves the formation of a crisis man- agement team and a plan for addressing those crises that may occur. Crisis manage- ment is approached in a systematic and ongoing manner to the point at which it is almost a science. The goal is to prevent as many crises as possible and effectively manage those that do occur.

3. Containment/damage limitation. This stage is where the management of the crisis occurs. The intent is to contain the crisis to the greatest extent possible and to mitigate the event so that organizational and stakeholder damage is kept to a minimum.

4. Recovery. In this stage, attempts are made to resume activities as much as feasible. The recovery will often proceed in stages as well. Short-term recovery aims to get the system back on line so a minimal acceptable level of service is achieved. Long-term recovery follows as operational activities are restored to their precrisis level. In some cases, improvements are made in the recovery process that bring the level of operations up to a higher level than before the crisis. An example would be a company that experiences a fire in its production facilities. After the fire, the rebuilt facility is usually better equipped with more modern machinery and technology than what existed in the old facility.

5. Learning. This stage involves reflecting on what can be learned from the cri- sis. The emphasis is not on searching for scapegoats and displacing the blame onto other parties, a response often encouraged in a litigious society. Instead, maximum attention is focused on improving current operational problems and preventing future ones.

A Framework for Crisis Management

Figure 1.1 presents another framework for crisis management—the one adopted in this book—in the form of a two-by-four matrix. With this framework, we draw from the work of previous crisis management researchers and add another dimen- sion to the analysis, the existence of the internal and external landscapes that engulf the organization. The internal landscape exists within the organization. It consists of the employees as well as the organizational culture of the organization. It is the human side of the company that exhibits the strengths and weaknesses of the organization.

The external landscape resides outside of the organization. It consists of all stakeholders who have some vested interest in the organization but are not directly part of it. These include government regulatory agencies, consumer groups, indus- try associations, and the media. It also consists of groups that are not necessarily stakeholders but can still have a huge impact on the operations of the company.

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12 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

These may include terrorist groups or even a jealous spouse of an employee who works in the organization. The external environment can also include forces such as the weather and other natural disasters as well as a downturn in the economy.

The progression of stages in the crisis management process follows a four-phase sequence. There is the landscape survey, followed by strategic planning, then crisis management, and finally the organizational learning stage. Of course, these stages can overlap to some degree. Each stage is discussed next.

Landscape Survey

The framework begins with the landscape survey, shown on the far left side of Figure 1.1. The top half of the landscape survey looks at processes that man- agement needs to evaluate (i.e., inside the internal landscape). Identifying the strengths and weaknesses that exist within the organization is one such process. Such weaknesses indicate points at which the company may be vulnerable to a crisis attack. Enthusiasm for crisis management planning is another key element to gauge. Some organizations are highly prepared for crisis events, whereas others are more complacent (Pearson & Mitroff, 1993). The degree of enthusiasm for crisis management is also a function of the organization’s culture (Stead & Smallman, 1999), its ethical environment, and the diligence with which the company enforces its safety policies.

The bottom half of the landscape survey (the external landscape) focuses on events occurring outside of the organization. The industry vulnerability is at the forefront of the types of crises a specific organization encounters. For example, companies in the chemical industry are concerned about chemical leaks. Food manufacturers focus on crises pertaining to disease problems such as an E. coli out- break. Within the hotel and lodging industry, the physical safety of guests is a major concern. The location of a hotel, for example, on coastal areas, can open up to vulnerabilities of flooding, earthquakes, and potential tsunamis (Henderson, 2005).

For companies operating across international borders, the degree of political stability of the host country is important to consider. Another key factor is the general attitude of the host country toward the home country of the multinational corporation (MNC). Any heightened tensions that may exist between these two groups can lay the groundwork for a potential crisis. Globalization implications must also be evaluated. Much globalization seems to progress at the expense of

Figure 1.1 A Framework for Crisis Management

Landscape Survey Strategic Planning Crisis Management Organizational

Learning

The Internal Landscape

What crisis threats exist INSIDE of our organization?

How can our organization plan for potential crisis events?

How should we manage our INTERNAL stakeholders during a crisis?

What can our organization learn from this crisis?

The External Landscape

What crisis threats exist OUTSIDE of our organization?

What planning has been done outside of our organization to help us prepare for potential crisis events?

How should we manage our EXTERNAL stakeholders during a crisis?

What learning is taking place outside of our organization in relation to the type of crisis we just experienced?

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Chapter 1. A Framework for Crisis Management 13

a major stakeholder, the home country’s manufacturing employees. For example, manufacturing operations that leave the home country for cheaper labor in another country usually leave a wake of unemployed workers back in the home country. Such moves do not sit well with local stakeholders such as labor unions.

The technological advancements within an industry must also be considered part of the external landscape. For some industries, technology can lay the ground- work for a crisis. In the commercial airlines industry, the smooth functioning of all technological systems is essential for the safety of those on the flight. In other industries, technology is important but not necessarily life threatening—yet it can still be the source of a major crisis. Retail chains rely on information technology to communicate and manage their field units. A malfunction in such a system will create a crisis, but not one that is physically harmful to employees or customers.

Strategic Planning

Within the internal landscape of the organization, the strategic planning phase focuses on preventing crises when possible and planning how to mitigate their effects when prevention is not possible. Within the internal landscape of the organi- zation, crisis planning begins with forming the crisis management team. The team acts as the management unit that prevents or directs the organization through the crisis. One of the tasks of the team is to periodically assess potential crises that may occur to the organization. For example, school districts for all grade levels, as well as colleges and universities, should plan regularly for a dysfunctional student who may become violent on school property. Another potential crisis involves the quick evacuation of a building, such as in the event of a fire.

Crisis management teams also formulate plans that provide general guidelines for managing a crisis (Coombs, 2006). Such guidelines include who should address the media as well as specific procedures for managing specific crises that are unique to the organization. In other words, these guidelines address the organization’s potential crises. During the strategic planning stage, some teams conduct mock disasters in order to test the organization’s crisis management response.

Within the external landscape, activities focus on what is occurring in the indus- try to prevent and manage crisis events. Existing government regulations in many industries are designed to prevent a crisis from occurring. Examples of these types of agencies abound. The Federal Aviation Administration (FAA) and the Transportation Security Administration (TSA) work to ensure safety in the air travel industries. Nearly all industries impose additional standards through associations that exist for the industry.

Crisis Management

We define crisis management as the stage at which the organization is encounter- ing some type of crisis that has occurred. During this stage, efforts are focused on addressing the crisis and resuming operations as quickly as possible. This process

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14 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

involves managing the various primary and secondary stakeholders. Primary stake- holders typically include the owners, employees, customers, local communities, and suppliers (Wheeler & Sillanpää, 1997). Secondary stakeholders include any other groups that have some type of interest in the organization. For example, People for the Ethical Treatment of Animals (PETA) has an interest in companies that use ani- mals for laboratory research. A crisis can result when such a group takes an activist stand against a company that uses animals for this purpose.

Stakeholders can also be divided into internal and external groups. Internal stakeholders include the owners and the employees. External stakeholders include customers, suppliers, the local community, various government entities, and spe- cial interest groups. Within the internal landscape, the crisis management process focuses on addressing the needs of the owners and the employees during the crisis. The external landscape looks at how the organization manages the remaining stake- holders that exist outside of the firm.

Organizational Learning

Within the internal landscape, the key question that management must ask is, What can be learned from the crisis? One of the keys to learning from a crisis is not to wait too long after the event has occurred, lest management reach a stage termed “forgetfulness” (Kovoor-Misra & Nathan, 2000). In this stage, the organization has returned to normal operations, and the motivation to evaluate and learn from the crisis wanes.

The focus of learning should center around two themes: (1) what can be done to prevent the crisis from recurring, and (2) if a similar crisis does occur, what can be done to soften its impact? It is possible that management will discover that it han- dled some processes well during the crisis, while not performing as well on other aspects. Pearson and Clair (1998) suggested that such an evaluation be examined in terms of degrees of success and failure. For example, an organization may suc- ceed in resuming operations in a timely manner but fail at protecting its reputation. Learning to examine failures on the part of management is a necessary ingredient in being more proactive in the future (Carmeli & Schaubroeck, 2008). Instead of learning from a crisis, some organizations do not seem to heed the lessons from the event, and as a result, repeat the same mistakes when similar incidents occur in the future. Yet an organization that is successful at learning will change its policies and procedures when necessary and apply that new knowledge to future crisis events.

In the external landscape, government regulators often reevaluate and renew their directives after a crisis. Certainly the airline industry has changed dramatically in terms of safety regulations after America’s worst terrorist incident on September 11, 2001. Government regulations are often implemented or upgraded after a crisis, usually to increase the safety of stakeholders in the affected industry. Stakeholders external to the organization may also change their outlooks after a crisis. At a minimum, such stakeholders will be more aware and compassionate toward an organization that has experienced a crisis. After the Virginia Tech massacre in April 2007, a wave of sympathy and solidarity spread among many citizens throughout the country, and even worldwide. At the same time, some parties were critical of the

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Chapter 1. A Framework for Crisis Management 15

university, questioning whether certain measures could have been taken to prevent or mitigate the crisis. Indeed, in 2012, a jury found the university negligent for not warning students in a timely manner of the threat of an active shooter on campus (Lipka, 2012).

Development of the Book

Chapter 1: A Framework for Crisis Management

This chapter outlines the framework that is presented in the book. Figure 1.2 overviews the progression of the remaining chapters.

Chapter 2: The Crisis Management Landscape

This chapter begins our survey of the strategic landscape that serves as a breed- ing ground for many of the crises organizations face. The focus is on six of the broader trends that are common across most cultures and business environments.

Chapter 3: Sources of Organizational Crises

In this chapter, we explore the sources of crises from several perspectives. First, an analysis of the external environment is presented from the political–legal, eco- nomic, social, and technological perspectives. The external environment is impor- tant to analyze because many crisis events emerge from the volatility of these four sectors of the environment. Crises are also viewed from the industry and organiza- tional life cycle perspectives because different stages of the life cycle have their own unique vulnerabilities to a crisis.

Landscape Survey Strategic Planning Crisis Management Organizational

Learning

The Internal Landscape

The External Landscape

Chapter 10: The Underlying Role of Ethics in Crisis Management

Chapter 9: The Importance of Organiza- tional Learning

Chapter 8: Crisis Communi- cations

Chapter 7: Crisis Management: Taking Action When Disaster Hits

Chapter 4: A Strategic Approach to Crisis Management

Chapter 6: Organiza- tional Strategy and Crises

Chapter 2: The Crisis Management Landscape

Chapter 3: Sources of Organiza- tional Crises

Chapter 5: Forming the Crisis Management Team and Writing the Plan

Crisis

Figure 1.2 Overview of the Book

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16 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

Chapter 4: A Strategic Approach to Crisis Management

In this chapter, we outline the strategic planning process and its link to crisis anticipation and prevention. One of the key themes of the chapter is the need to incorporate crisis management into the strategic management process of the orga- nization. As such, some of the traditional tools used in strategic planning, such as the SWOT (strengths, weaknesses, opportunities, and threats) analysis, should also be used in assessing crisis vulnerability.

Chapter 5: Forming the Crisis Management Team and Writing the Plan

The essence of crisis planning is forming the crisis management team (CMT) and then writing the crisis management plan (CMP). Guidelines are provided for both tasks in this chapter. The composition of the CMT is discussed, including the qualities team members should have. Components of the CMP are overviewed and a template is included as the Appendix at the end of this book. The chapter con- cludes by offering guidelines for crisis management training efforts.

Chapter 6: Organizational Strategy and Crises

This chapter links the organization’s strategy to its crisis vulnerability at the corporate and business levels. Corporate strategies determine the type of indus- tries in which the organization operates while business strategies focus on how the company competes in its chosen industry. The choice of strategies at both levels influences the types of crises the organization may face in the future.

Chapter 7: Crisis Management: Taking Action When Disaster Hits

In this chapter, the tactical responses to a crisis are explored. The response strategy is divided into three phases: when the crisis first hits, during the crisis, and when the crisis winds down. Each phase has unique decision points that need to be addressed. An emphasis on effective decision making and evaluation is stressed throughout each phase.

Chapter 8: Crisis Communication

One of the most important challenges of crisis management is effective com- munication with both internal and external stakeholders. This chapter presents guidelines for maneuvering in this area of communication. In addition, one of the new challenges of crisis communication is learning how to manage the complicated world of social media. Examples of social media crises are presented and guidelines on how to use this new method of communication are offered.

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Chapter 1. A Framework for Crisis Management 17

Chapter 9: The Importance of Organizational Learning

This chapter focuses on the need to learn from the crisis event. Organizational learning does not come naturally, however, because the push to get the organiza- tion back to normal operations often supersedes the need to reflect on preventing future crises. This chapter examines the potential learning areas in each of the four stages of the crisis management framework. Barriers that can impede learning are discussed, as well as approaches to build a learning organization.

Chapter 10: The Underlying Role of Ethics in Crisis Management

This chapter examines how executive misbehavior is a key force behind many crises that occur in organizations today. The reasons why ethical blunders take place are examined. Changing the organizational culture is needed to improve the ethical climate of the company. The ways in which this change can be accomplished are presented.

Chapter 11: Emerging Trends in Crisis Management

This chapter examines the future of crisis management. Emerging trends are identified in each of the four stages of the framework: landscape survey, strategic planning, crisis management, and organizational learning.

Summary

The field of crisis management is growing in scope and sophistication. This book acknowledges these changes by recognizing that crisis management should be a part of the organization’s strategic management process. Drawing on the work of others in the field, we employ a crisis management framework that utilizes a two-by-four matrix that recognizes four phases of the crisis management process. In addition, we add the importance of acknowledging the internal and external landscapes that exist within each phase.

Questions for Discussion

1. Why is it important to understand a crisis in terms of its different stages?

2. Identify a recent crisis event that occurred where you work. Discuss the different stages of the crisis in terms of:

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18 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

■ Landscape survey

■ Were there any events occurring in your organization that might have contributed to the formation of this crisis?

■ What events outside of your organization contributed to the crisis?

■ Strategic management

■ Did your organization have any plans in place to address this type of crisis?

■ What industry controls or government regulations were designed to prevent this type of crisis?

■ Crisis management

■ How well did your organization respond to the crisis? ■ Were any outside agencies or stakeholders involved in helping your

organization manage the crisis?

■ Organizational learning

■ What lessons did your organization learn from experiencing this crisis? ■ Were there any changes in your industry or within government regula-

tions that took place after this crisis occurred?

Chapter Exercise

As a class, determine the following:

1. What events could happen to the class that would constitute a crisis? Write these on the board and then seek a consensus as a class on the top five crisis events. Focus on these as you proceed to the next step.

2. What crisis plans are available that could address each of these five poten- tial crises? Distinguish between resources that are available inside the class- room and those that exist outside of the classroom.

Mini-Case: Scandal at Penn State

For years, assistant Penn State football coach Jerry Sandusky had appeared to be a model citizen in the community. He was a respected football coach under the leg- endary Joe Paterno and was the founder of The Second Mile, a charitable organiza- tion to help disadvantaged youth. He was also a serial child rapist.

Of course, many people would think that it was unfortunate that no one was aware of this his dark behavior. Perhaps if someone knew and contacted the author- ities, Sandusky could have been caught and stopped. In fact, people knew about Jerry Sandusky, and some of them were in high places at Penn State University. An internal investigation of the incident summarizes the findings:

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Chapter 1. A Framework for Crisis Management 19

Four of the most powerful people at The Pennsylvania State University— President Graham B. Spanier, Senior Vice President-Finance and Business Gary C. Schultz, Athletic Director Timothy M. Curley and Head Football Coach Joseph V. Paterno—failed to protect against a child sexual predator harming children for decades. Those men concealed Sandusky’s activities from the Board of Trustees, the University community and authorities. They exhibited a striking lack of empathy for Sandusky’s victims by failing to inquire as to their safety and well-being, especially by not attempting to deter- mine the identity of the child who Sandusky assaulted in the Lasch Building in 2001. (Freeh, Sporkin, & Sullivan, 2012, p. 14)

An examination of meeting notes and e-mails reveals that Spanier, Schultz, Curley, and Paterno had met and discussed the problem with various authorities, not including the board of trustees. However, the criticism and what led to the scan- dal was that they did not do enough to prevent further reoccurrences of Sandusky’s predatory behavior. Was it an attempt to cover up an incident so as not to embarrass the university and its stakeholders? Or was it a strategy on their part of the leader- ship to be discreet concerning a university employee with nearly 30 years of service? Or was the event so bizarre and uncomfortable that they just did not know how to manage it properly?

What is known is that these four university officials went into crisis manage- ment mode and attempted to manage the scandal. They held numerous meetings, devised various strategies, and contacted various authorities, including the univer- sity police and legal office. Specifically, two areas in their crisis management efforts were not sufficient: (1) the board of trustees was not kept in the information loop, and (2) the victims of the assaults were not properly identified and protected. Crisis management is a huge task and must be taken seriously. For these four men, it cost them their jobs; it put the university through an agonizing trial; and perhaps most important, it changed the lives of a number of young men forever because of repeated assaults from a child predator.

The Scandal

Jerry Sandusky joined the coaching staff of Penn State in 1969 where he remained until his retirement in 1999. After his retirement, he continued to have access to the Penn State campus athletic facilities because of his status as an emeri- tus professor. The scandal that involves Sandusky became the worst ever in the his- tory of college sports and led to harsh penalties by the National Collegiate Athletic Association (NCAA) against the university (Wolff & Gagne, 2012).

The crisis commenced with two events that occurred more than a decade ago. In May 1998, a mother reported to the University Police Department that Sandusky had showered with her 11-year-old son in the Lasch Building on the Penn State campus (Freeh et al., 2012). The police investigation does not reveal evidence of a crime, but it did bring a reprimand from a police detective not to shower with any other children. A caseworker from the Department of Public Welfare was pres- ent at this meeting. Police Chief Thomas Harmon closed the case: “Sandusky was

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20 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

advised that there was no criminal behavior established and that the matter was closed as an investigation” (Freeh et al., 2012, p. 20). At this point, all four Penn State officials—Spanier, Schultz, Curley, and Paterno—were informed of the police report and proceeded as if the event were now behind them.

That was to change on February 9, 2001, when Mike McQueary, a Penn State football assistant, witnessed a sexual encounter involving Jerry Sandusky and a 10-year-old boy in the showers of the Lasch Building. McQueary reported the inci- dent to Coach Paterno the following day. Paterno met with Curley and Schultz on Sunday, February 11. University president Spanier joined them to discuss a strategy for addressing the incident in late February. They agree to confront Sandusky. On March 5, Curley met with Sandusky and informed him that he was uncomfort- able with his behavior with young boys. Curley advised Sandusky not to bring any more boys to the athletic facilities. On March 19, Curley met with the execu- tive director of the Second Mile charitable organization, of which Sandusky is the founder, and informed him of the incident that was observed by Mike McQueary. The Second Mile leadership did not take action and concluded that it was a “non- incident” (Freeh et al., 2012). Meanwhile, President Spanier made no mention of the Sandusky incident at the board of trustees meeting on March 16, 2001.

Eight and a half years later, on January 7, 2010, the university received subpoenas from the Pennsylvania attorney general for personnel records on Sandusky. During 2010–2011, investigations were launched concerning Jerry Sandusky, and the crisis rapidly escalated, resulting in charges of child sex abuse that occurred both on and off the Penn State campus. The resulting trial occurred in 2012, and on July 23, Sandusky was found guilty of 45 counts of child sex abuse.

The Response

The viewpoints of the stakeholders associated with this case varied. Some think the university should be vilified for its lack of empathy for the victims and its inability to keep a child predator out of its midst, resulting in harsh sanctions by the NCAA. Others feel that the scandal was a “witch hunt” with authorities looking for scapegoats to blame. The crisis has become an emotional hot point in State College, Pennsylvania, where those loyal to the university and the late coach Paterno have been pitted against others who believe the university was irresponsible (Fitzpatrick, 2012).

The Board of Trustees Response

The board of trustees removed legendary football coach Joe Paterno and President Graham Spanier from their positions. The two other officials, Senior Vice President for Finance and Business Gary C. Schultz and Athletic Director Timothy M. Curley both stepped down (Tsikoudakis, 2011).

In a dramatic move, interim Penn State president Rodney Erickson, who took over after Graham Spanier was ousted, ordered the removal of a statue of Coach Paterno from outside Beaver Stadium. Although the decision was controversial, particularly from alumni, he felt the icon was a “lightning rod of controversy” and

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Chapter 1. A Framework for Crisis Management 21

needed to be removed so that healing could occur. Erickson commented, “Were it to remain, the statue will be a recurring wound to the multitude of individuals across the nation and beyond who have been the victims of child abuse” (Brown, 2012).

The NCAA Response

The sanctions handed down by the NCAA were especially harsh, so much so that it even surprised some sports journalists, who felt the association was more accustomed to dealing with athletes who receive illegal gifts such as free tattoos or athletic shoes (Wolff & Gagne, 2012). The penalties to Penn State were meant to punish, and in doing so, many innocent stakeholders also suffered. The sanctions included:

■ The football program is barred from any postseason games for four years, starting with the 2012 season.

■ Scholarships were cut back beginning in 2013. ■ Coach Paterno’s wins for the past 14 years will be taken off the books, a total

of 111 from his once-record 409 victories.

The sanctions have come under considerable criticism because of the far- reaching extent of the punishments. Indeed, the intent of the NCAA was to rebuild “a culture that went terribly awry” (Maher Bachman, & Miller, 2012). However, the sanctions rely heavily on a single report issued by former FBI Director Louis Freeh and two associates at his law firm, also known as the Freeh Report (Maher et al., 2012).

Mini-Case Questions

1. Review the definition of a crisis given in this chapter. How does this event illustrate a crisis?

2. Given that the initial events occurred as far back as 1998, why do you think this case took so long to become public knowledge?

3. Were the sanctions by the NCAA too harsh, too lenient, or appropriate? Why?

Mini-Case References

Brown, E. (2012, July 23). NCAA set to act as Penn State removes statue. Wall Street Journal, p. A3.

Fitzpatrick, F. (2012, June 4). Fury returns to Penn State. Newsweek, 14–16. Freeh, L., Sporkin, S., & Sullivan, E. (2012, July 12). Report of the Special Investigative

Counsel regarding the actions of The Pennsylvania State University related to the child sexual abuse committed by Gerald A. Sandusky. Retrieved August 2, 2012, from http:// www.thefreehreportonpsu.com/REPORT_FINAL_071212.pdf.

Maher, K., Bachman, R., & Miller, J. (2012, July 24). NCAA slams Penn State—Top col- lege football program is hobbled for years; Paterno wins record negated. Wall Street Journal, p. A3.

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22 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

Tsikoudakis, M. (2011). Penn State abuse scandal sharpens focus on risks. Business Insurance, 45 (45), 1, 21.

Wolff, A., & Gagne, M. (2012, July 2). Is this the end for Penn State? Sports Illustrated, 38–41.

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Coombs, W. (2006). Code red in the boardroom: Crisis management as organizational DNA. Westport, CT: Praeger.

Coombs, W. (2007). Ongoing crisis communication: Planning, managing, and responding (2nd ed.). Thousand Oaks, CA: Sage.

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Fink, S. (1996). Crisis management: Planning for the inevitable. New York: American Management Association.

Hartley, R. (1993). Business ethics: Violations of the public trust. New York: Wiley. Henderson, J. (2005). Responding to natural disasters: Managing a hotel in the aftermath of

the Indian Ocean tsunami. Tourism and Hospitality Research, 6 (1), 89–96. Herbane, B. (2010). Small business research—time for a crisis-based view. International

Small Business Journal, 28 (1), 43–64. Kiernan, P., & McKay, B. (2012, January 13). Coke, Pepsi Attempt to Ease O.J. Fears. Wall

Street Journal, p. B1. Kovoor-Misra, S., & Nathan, M. (2000, Fall). Timing is everything: The optimal time to learn

from crises. Review of Business, 31–36. Lipka, S. (2012, March 23). Jury’s verdict against Virginia Tech sends strong messages to col-

leges. Chronicle of Higher Education, 58 (29), p. A32. Marcus, A., & Goodman, R. (1991). Victims and shareholders: The dilemmas of presenting

corporate policy during a crisis. Academy of Management Journal, 34 (2), 281–305. Mitroff, I. (1989, October). Programming for crisis control. Security Management, 75–79. Mitroff, I., Diamond, M., & Alpaslan, C. (2006). How prepared are America’s colleges and

universities for major crises? Change, 38 (1), 60–67. Myers, K. (1993). Total contingency planning for disasters: Managing risk . . . minimizing loss . . .

ensuring business continuity. New York: Wiley. Nader, R. (1965). Unsafe at any speed. New York: Grossman. Pearson, C., & Clair, J. (1998). Reframing crisis management. Academy of Management

Review, 23 (1), 59–76. Pearson, C., & Mitroff, I. (1993). From crisis prone to crisis prepared: A framework for crisis

management. Academy of Management Executive, 7 (1), 48–59. Richardson, B. (1994). Socio-technical disasters: Profile and prevalence. Disaster Prevention

and Management, 3 (4), 41–69. Roux-Dufort, C. (2009). The devil lies in details! How crises build up within organizations.

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agement policies and practices. Journal of Management Studies, 40 (2), 573–606. Smith, D. (1990). Beyond contingency planning: Towards a model of crisis management.

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learning and crisis. Management Learning, 38 (5), 519–538.

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Chapter 1. A Framework for Crisis Management 23

Spillan, J., & Crandall, W. R. (2002). Crisis planning in the nonprofit sector: Should we plan for something bad if it may not occur? Southern Business Review, 27 (2), 18–29.

Stead, E., & Smallman, C. (1999). Understanding business failure: Learning and un-learning lessons from industrial crises. Journal of Contingencies and Crisis Management, 7 (1), 1–18.

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stakeholder value. London: Pittman.

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CHAPTER 2

The Crisis Management Landscape

Opening Case, Part 1: How a Distance of 10 Feet Can Be Fatal

Ghent, West Virginia, is a small community near the Winterplace Ski Resort on Flat Top Mountain. The Little General Store is located about a mile away from the resort on U.S. 19, a two-lane highway that connects Ghent to nearby Beckley, West Virginia. For years, the Little General Store was the hub of the community. It was a typical convenience store with gas pumps, a small grocery store, and a pizza shop. Locals and skiers frequented the Little General for gas, coffee, some friendly con- versation, and quick groceries. That all changed at 10:53 A.M. on January 30, 2007, when a propane tank exploded behind the store, killing four people and injuring five others (Busick, 2012). The store was leveled in the blast. Today, the area is vacant, save for the memorials that have been placed to honor those who died. The Little General Store never reopened in that location.

Landscape Survey Strategic Planning Crisis Management Organizational

Learning

The Internal Landscape

The External Landscape

Chapter 10: The Underlying Role of Ethics in Crisis Management

Chapter 9: The Importance of Organiza- tional Learning

Chapter 8: Crisis Communi- cations

Chapter 7: Crisis Management: Taking Action When Disaster Hits

Chapter 4: A Strategic Approach to Crisis Management

Chapter 6: Organiza- tional Strategy and Crises

Chapter 2: The Crisis Management Landscape

Chapter 3: Sources of Organiza- tional Crises

Chapter 5: Forming the Crisis Management Team and Writing the Plan

Crisis

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26 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

The Little General Store had a fatal design flaw that existed for years before it was finally uncovered. The flaw was not with the building or the gas pumps, but with the location of a 500-gallon propane tank used to heat the ovens to bake the pizza in the store. The propane tank was located adjacent to the back of the store, only inches from the outer wall of the building. However, the West Virginia Fire Commission and the Occupational Safety and Health Administration (OSHA) required a tank of 500 gallons or more to be located at least 10 feet from the build- ing (U.S. Chemical Safety Board [CSB], 2008).

The Explosion

What was supposed to occur that morning was a simple propane transfer between tanks. Two technicians from the Appalachian Heating Company were performing the liquid transfer from a 500-gallon tank located next to the build- ing to another tank located 10 feet away from the structure. The tank adjacent to the building was owned and operated by the Ferrellgas Company and had been in that location since 1994. The new tank was operated by Appalachian Heating, which was taking over the contract to supply propane to the store (CSB, 2008).

At some point in the morning, the lead technician (who had one and a half years of experience with propane) left to service another call, leaving the junior technician (who had about six weeks of experience on the job) to work alone. At 10:25 A.M. , the junior technician attempted to extract the plug from the old tank, and propane began to spew out uncontrollably. The technician was not able to stop the flow. The U.S. Chemical Safety and Hazard Investigation Report describes what happened next:

Liquid propane sprayed upward, against the roof overhang, and dense propane gas accumulated at ground levels around the tank and the foundation of the build- ing. Over the next 25 minutes, the escaping propane entered the Little General store through openings in the roof overhang. (CSB, 2008, p. 5)

The dissipation of propane inside and around the store was creating a deadly situation. If the propane encountered an open flame in a pizza oven, or an electrical spark, certain detonation would occur. At 10:40 A.M ., the junior technician called 911 and alerted the lead technician of the problem by phone. The Ghent Volunteer Fire Department responded with a captain and two emergency medical technicians (EMTs). The lead technician for Appalachian Heating also returned to the store. Meanwhile, there were still four employees inside the store, which was now accu- mulating a dangerous quantity of propane.

At approximately 10:53 A.M. , the worst-case scenario occurred, an explosion that leveled the store. The two technicians, a former captain of the Ghent Fire Department and an EMT were killed. All were standing outside near the leak- ing propane tank. The four store employees, a firefighter, and another EMT were injured (Busick, 2010). The blast was so forceful that it registered on seismographs at Virginia Tech, some 50 miles away (Heyman, 2007). Ben Monast, the manager at

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the nearby ski shop, was seated at his desk and felt the concussion from the blast in his chest. “I thought we’d been hit by lightning. . . . The whole place shook pretty violently” (Urbina, 2007, p. 12).

The Grieving

For the small community of 800 residents, the event was devastating. This is an area where everybody knows everybody else, and many in the commu- nity are lifelong residents. “For us, it’s just like 9/11,” commented Roy Coalson, a volunteer firefighter for 25 years for the Ghent Fire Department (Heyman, 2007, p. 19). William Manning, a bartender at the nearby Bear Den, remarked, “I don’t cry over things easily. . . . They’re my best friends. I’ve known these peo- ple most of my life. You can’t replace them” (Urbina, 2007, p. 12). For Governor Joe Manchin III, the explosion was yet another event that had made his tenure in office a difficult one. Only a year earlier, 12 coal miners had died in an accident at the Sago Coal Mine in Sago, West Virginia. That accident too, was caused by a dangerous gas, methane, a sinister vapor that is a continual threat to coal miner safety (Madsen, 2009).

Opening Case Part 1 Discussion Question

One of the problems with an accident like this one is that regulations already exist that—if followed—could have prevented it. Public outcries for “more govern- ment regulation” are often misplaced, when better enforcement is what is really needed. For the case involving the Little General Store, regulations were in place to govern the use of propane.

However, there are certainly other instances where additional regulation of a work activity may be necessary. When an industry attempts to regulate itself, without existing laws, it is referred to as “self-policing.” As a class, discuss the effec- tiveness of self-policing. Does it always work? What industries might benefit from additional regulations? Are some industries over-regulated?

Opening Case Part 1 References

Busick, J. (2010, October 1). Propane: This common fuel can be uncommonly deadly. Safety Compliance Letter, Issue 2518, 5–6.

U.S. Chemical Safety Board (CSB). (2008, September). Investigation Report: Little General Store—Propane Explosion. U.S. Chemical Safety and Hazard Investigation Board. Retrieved July 29, 2012, from http://www.csb.gov/assets/document/ CSBFinalReportLittleGeneral.pdf.

Heyman, D. (2007, February 1). Propane blast hits a small town hard. New York Times, p. 19.

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Madsen, P. (2009). These lives will not be lost in vain: Organizational learning from disaster in U.S. coal mining. Organization Science, 20 (5), 861–875.

Urbina, I. (2007, January 31). Four killed in gas explosion near West Virginia resort. New York Times, p. 12.

Introduction

Crises are the ultimate result of many actions and inactions. Some are acts of God, but human decision making and action or inaction are usually respon- sible for most of the crises we encounter. All of these are unexpected events that can produce serious negative repercussions. Any organization can be confronted with and should be prepared for a “what-if scenario,” what we com- monly call a crisis. As stated in Chapter 1, a crisis is an event that has a low probability of occurring, but, should it occur, can have a vastly negative effect on the organization.

One of the most prominent examples of a crisis in recent history is the terrorist attacks on September 11, 2001, on New York City’s World Trade Center buildings and the Pentagon in Washington, D.C. However, terrorism represents only a small component of the potential crisis events that can hit an organization. Other types of crises include fires, natural disasters, industrial accidents, workplace violence, extortion attempts, product or company boycotts, and negative publicity due to outsourcing jobs to other countries. Crises related to “information age” activi- ties, including computer system sabotage, copyright infringement, and identity theft and counterfeiting, are common. In addition, the popularity of social media can turn almost any negative event into an organizational crisis under the right circumstances.

This chapter begins our study of crisis events by examining what we call the crisis management landscape . Important trends are identified that are occurring on a widespread basis throughout the global environment. In our discussion, we overview and link these trends to crisis management.

The Crisis Management Landscape

Six trends in the crisis management landscape, ranging from less to more con- trollable, are identified in Figure 2.1. Trends on the left side of the figure are less subject to strategic planning, while those on the right side of the figure can often be managed with effective strategic planning. They also shift upward as they move from left to right, indicating that the internal environment becomes an increasingly stronger factor in the origin of these crises events. Our discussion begins with the transboundary nature of crises and then proceeds to the right of the figure, ending with a discussion on the movement toward globalization and outsourcing.

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Crises Have Become More Transboundary in Nature

Typically, we think of an organizational crisis as having distinct geographical boundaries. An industrial accident, a fire, or an unexpected loss of production capability can render a company useless meeting the needs of its customers. But today’s fragile supply chains that focus on lean management and global suppli- ers mean an organizational crisis can be transboundary in nature. For example, the 2011 tsunami that hit Japan interrupted supply chains all over the world, particularly in the automotive industry. Disruptions were most acute among Japanese firms like Toyota, Nissan, and Honda, but the effects were even felt at carmakers based in the United States and other parts of the world (Shappell, 2012). A crisis that affects stakeholders in multiple countries is called a trans- boundary crisis . These are especially challenging to manage because of their complexity.

Crisis scholar Arjen Boin (2009) maintains that transboundary crises have four characteristics: (1) they cross geographical boundaries, (2) they cross functional boundaries, (3) they cross traditional time barriers, and (4) they involve a tightly woven web of critical infrastructures.

1. A Transboundary Crisis Crosses Geographical Boundaries

Transboundary crises transcend geographical barriers that extend far outside the confines of a single organization. For example, in August 2003, a seemingly insignificant power utility malfunction was mishandled by authorities in Ohio, culminating into a major blackout affecting millions of citizens in the northeast- ern United States as well as the Canadian province of Ontario (Lagadec, 2009). Severe weather and natural disasters can occur in one part of the world and wreak havoc in another part because of the impact on supply chains. A pandemic such

Landscape Survey Less Strategic Control More Strategic Control

The Internal Landscape

The External Landscape

Crises have become more transboundary in nature

Terrorism remains an ongoing threat

Social media and the Internet intensify the effects of a crisis

Human-induced missteps are at the core of the majority of crises

Environmental damage and sustainability of resources cause crises to have a global impact

Globalization increases the risk of organizational and societal crises

Figure 2.1 Trends in the Crisis Management Landscape

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as the SARS (severe acute respiratory syndrome) epidemic can interrupt inter- national travel, as it did in late 2002 and 2003. Indeed, this affected the authors of this book, who were preparing to take crisis management students to China, only to have their plans cancelled due to a crisis: the threat of a widespread flu outbreak.

The occurrence of natural disasters is also a function of geography. Earthquakes, for example, occur near fault zones. In the United States, active fault zones exist in California and along the New Madrid seismic zone, an area that encompasses southeastern Missouri, northeastern Arkansas, and western Tennessee. Unusual weather patterns such as typhoons and cyclones can be especially devastating in developing countries. In these areas, fatalities can be especially high. A tsunami is another natural phenomenon that can have wide- spread impact. On December 26, 2004, an earthquake off the coast of Sumatra (Indonesia) triggered a tsunami that killed nearly 250,000 people in South Asia (Cheung & Law, 2006).

A transboundary crisis can affect important resources over a more local- ized geographic area. In the United States, consider the impact of Hurricane Ike on the highly automated refinery industry in the Gulf of Mexico, a region responsible for about 20 percent of the nation’s oil-producing capacity (Lee & Thurman, 2008). When the storm hit in August 2008, refineries “shut in” operations to minimize damage to oil-producing facilities. After the storm passed, production slowly resumed, but not fast enough to offset gas shortages in major cities such as Nashville, Tennessee; Atlanta, Georgia; and Charlotte, North Carolina. The effects of the shortages were intensified by panic buying and high prices.

2. A Transboundary Crisis Crosses Functional Boundaries

Transboundary crises can cross functional boundaries and threaten mul- tiple life-sustaining systems and infrastructures (Ansell, Boin, & Keller, 2010). Put another way, the responsibility for managing the crisis may rest with multiple organizations, some of which may not be closely related. For example, both British Petroleum (BP) and various U.S. government agencies managed the BP oil spill in the Gulf of Mexico. Likewise, the response to Hurricane Katrina was managed by multiple stakeholders in both the private sector—those businesses that sustained damage—as well as government agencies at the local, state, and federal levels. What makes the crisis response difficult is that stakeholder response is often loosely coupled with other stakeholders (Ansell et al., 2010), making coordination more complex.

Transboundary crises can also consist of a “package of disasters” (Green, 2004, p. 61), such as the combination of a severe weather event and a natural disaster. What is commonly referred to as the 2011 tsunami strike in Japan was actually a trio of disasters consisting of an earthquake, a tsunami, and a nuclear calamity. Developing countries are especially vulnerable to these types of crises, with the result usually involving a large number of fatalities (Spillan, Parnell, & Mayoro, 2011). For example, a civil war may be followed by a famine, or a natural disaster

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may instigate a flood of refugees as people are forced to leave their ravished homes. The wars in Mozambique illustrate how an already damaged country fared very poorly when hit with heavy rains and flooding in 2000 (Green, 2004). Developed countries such as the United States have not seen such high rates of casualties from these multiple disasters, although Hurricane Katrina was an example of a package of crises with many fatalities. In this example, the hurricane was followed by the breakdown of law and order and by general government incompetence across a number of functional boundaries.

3. A Transboundary Crisis Crosses Time Boundaries

Transboundary crises do not have definite beginning or ending points. Instead, they can have deep roots in their origins and linger for many years in their effects. Global climate change, oil spills, and the 9/11 attacks on the World Trade Center are examples of how time is blurred in a transboundary crisis (Ansell et al., 2010).

One of the themes of this book is the extensive impact social media can have on a crisis. Indeed, many crises may have origins in a rather obscure, unknown event that becomes public via an outlet such as YouTube. Long after the crisis appears to have ended, remnants can still be played and viewed by the public on YouTube or other websites. Such is the case with singer Dave Carroll’s now-famous United Breaks Guitars video. Carroll and his band were flying from Canada to the United States in March 2008 when they observed United Airlines baggage handlers throw- ing their guitars while waiting for their connecting flight in Chicago. Carroll’s guitar was damaged and he sought compensation from United Airlines. The airline refused, prompting him to write a song about his dilemma and post it on YouTube. The incident proved to be a huge public embarrassment for the airline (Grégoire, Tripp, & Legoux, 2011). This example is indeed a transboundary crisis, because the YouTube video can still be viewed worldwide years after the original event occurred.

4. A Transboundary Crisis Involves a Tightly Woven Web of Critical Infrastructures

Much of contemporary society consists of interlinking critical infrastructures. For example, the power grid that provides electricity for parts of the United States and Canada is tightly networked (Wachtendorf, 2009). As previously noted, a mal- function in Ohio can affect the power supply in Ontario. Perhaps the most notable example of a potential crisis that illustrated this web of critical infrastructures is the now-famous Y2K computer bug. In the early days of computer technology, programmers would save valuable space by using only two digits for the year. For example, instead of using four digits for 1999, the code would simply read 99. The Y2K bug concern occurred because a computer that rolled over to 2000 (which would read 00) might inadvertently read the date as 1900 (which would also read 00). A wide variety of speculation existed as to how the computer might function in such an instance, and many people believed that computers might produce strange and inaccurate results (Stallard, 1999).

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During the years leading up to 2000, a vast amount of work was completed to correct this potential problem. In many instances, companies used the Y2K crisis as a chance to completely upgrade their operating systems. The Y2K bug proved to be a nonevent, however, thanks in part to the effort invested in preparing for the worst. However, the cultural phenomenon that was occurring concurrently, particularly in the United States (Schaefer, 2004), was anything but a nonevent. Speculation was brewing in the late 1990s that the 2000 rollover would produce worldwide catas- trophes. Although they did not materialize, this example illustrates how computer systems have created a tightly woven global web of critical infrastructures.

Terrorism Remains an Ongoing Threat

Terrorism has always been a threat to entities throughout the world. Historically, terrorist acts were motivated by political ideals rather than religious ones (Pedahzur, Eubank, & Weinberg, 2002). Since the early 1990s, however, terrorism has changed on at least three fronts. First, the number of victims per attack has increased, because suicide bombers in particular are able to move into crowded areas before detonating their explosives, thus increasing the number of casualties exponentially. Second, religious extremists are behind the majority of the assaults (Perliger, Pedahzur, & Zalmanovitch, 2005). Finally, the targets of terrorist attacks are extending around the globe, not just in traditionally troubled areas such as the Middle East. In the United States, for example, the 1993 bombing of the World Trade Center signaled that terrorism with Middle Eastern ties had struck close to home. Because the perpetrator was a U.S. citizen, the 1995 bombing of the Alfred P. Murrah Federal Building in Oklahoma City destroyed Americans’ long-held notion that terrorism originates only from abroad. The innocence of the United States had been violated. The events of September 11, 2001, reinforced the continued threat of terrorism from abroad.

The Geographic Factor in Terrorism

Modern terrorists often strike in urban areas because they represent the finan- cial, political, and cultural centers of the state (Perliger et al., 2005). Striking an urban target inflicts a psychological as well as a physical blow to the local area and can maximize the number of casualties that can be inflicted with a single blow. Given the high concentration of businesses and government offices in urban areas, crisis management plans should include terrorist contingencies. Industries like destination tourism are most vulnerable.

Destination tourism is affected when an event occurs in a region of the world that causes the number of travelers to visit that region decline. A number of events, such as wars, localized diseases, and terrorist attacks, can affect tourism in a certain area (Glaesser, 2005). Terrorism puts geographic restrictions on a region, even if the region is relatively otherwise peaceful. For example, the country of Jordan is relatively safe, but because of its Middle East location it is subject to variations in tourism revenue (Ali & Ali, 2010).

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Managers and employees who were not previously convinced of the serious nature of terrorism changed their views after the attacks of September 11, 2001. In one day, the need for organizations to anticipate, prepare for, and respond to these potential events was made clear (Greenberg, Clair, & Maclean, 2002). For some businesses, the attack resulted not only in the tragic loss of a substantial number of employees but also a loss of key facilities and data (Greenberg, 2002). Many orga- nizations decimated by this attack never reopened. While the companies that were located in the World Trade Center’s Twin Towers were affected directly, thousands of other businesses were affected indirectly. Supply chains were interrupted, key information networks were destroyed, clients were lost, and business travel—at least in the short run—was seriously curtailed. In fact, the events of September 11 caused the worst disruption of worldwide tourism since World War II and triggered a temporary slowdown in the world’s economy (Ali & Ali, 2010). Clearly, terrorism strikes at a region physically in fatalities and property destruction and indirectly in disruptions to the commerce.

Preparing for Terrorism

Preparing for terrorist attacks is not an easy task for either the small business owner or the large corporate management team. Indeed, most organizations in developed nations depend on government entities to protect them from terrorist attacks. Following the September 11 terrorist attack on the World Trade Center, the U.S. government created the first Department of Homeland Security. Scholarly research on the effectiveness of combating terrorism followed, including three key journals. An online journal, the Journal of Homeland Security and Emergency Management, was launched in 2003 (Nickerson, 2011). In 2008, Critical Studies on Terrorism was begun, and one year later, Behavioral Sciences of Terrorism and Political Aggression commenced. Because terrorism is unlikely to disappear, crisis management teams should prepare for this threat, understanding that it could intensify in the years to come.

Social Media and the Internet Intensify the Effects of a Crisis

The Internet is closely related to organizational crises in two ways: it can facili- tate or it can even trigger one (González-Herrero & Smith, 2008). The Internet can facilitate a crisis by permitting individuals to spread negative information about an organization rapidly and over a broad geographical region at little or no expense. Consumers can discuss their negative experiences with products and services on dis- cussion forums, in YouTube videos, and on blogs, all forms of social media. Private individuals and groups have established websites dedicated to disseminating negative information about major firms, including such sites as www.allstateinsurancesucks .com, www.walmartwatch.com, and www.ihatestarbucks.com.

One example that illustrates the power of social media concerned Procter & Gamble (P&G) and its diaper product Dry Max Pampers. The product was intro- duced in March 2010 as “driest and thinnest” nappy ever. A number of parents

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complained about the product via blogs, claiming it was causing their babies to develop a rash. A Facebook page with 6,000 followers appeared and claimed chil- dren were developing “chemical burns” from the product (Birchall, 2010). P&G was quickly thrown into crisis management mode and was soon inviting mothers to their corporate headquarters in Cincinnati, Ohio, to discuss their concerns. The extent to which the product caused harm is not the only issue. From a crisis perspective, if one consumer believes the product caused the problem and com- municates it via social media, others may agree, even without consulting a medical opinion (Birchall, 2010).

One aspect of the Internet that enhances its ability to facilitate a crisis is the lack of oversight on of what is presented online. This occurs because editorial filters that are traditionally associated with print journalism do not exist in cyberspace (Bernstein, 2006). Put differently, the gatekeeper function that exists in traditional mass media does not exist in the online world (González-Herrero & Smith, 2010). Magazines, journals, and newspapers have some degree of oversight over the mate- rial that is printed in their venues. Opinions, whims, and downright anger can be expressed on some Internet sites, however, and in real time. As a result, organiza- tions are urged to monitor the Web regularly to stay abreast of public sentiment (Ziemnowicz, Harrison, & Crandall, 2011). Some companies such as Southwest Airlines and Dell have specialists who monitor bloggers and social networks and respond as needed (Conlin, 2007).

The Internet can also be the trigger point for a crisis, one example of which is the existence of a highly motivated hacker community (González-Herrero & Smith, 2008; Kovoor-Misra & Misra, 2007). Several types of hacking can occur. A denial-of-service attack causes the organization’s website either to slow down or to stop functioning altogether. Such an attack can lead to a sizable loss of revenue, similar to shutting down the store for the duration of the attack. Hacking can also occur in the form of security breaches in which customer database information is stolen, and ultimately to identity theft, a crisis that can create monumental problems for both the company and its customers. Another malicious attack occurs when a copycat website emerges that mimics a legitimate organization’s website (González-Herrero & Smith, 2010). Such websites can cause unsuspecting customers to send money and private credit card information to scammers who keep the cash but do not deliver the goods.

An alternate trigger point caused by the Internet occurs when a website mal- functions for a technical reason. When service is not available, customers cannot place their orders and the company’s revenue stream is interrupted. The impact can be significant for brick-and-mortar businesses, but can even be devastating for organizations that rely solely on Internet revenue.

Human-Induced Missteps Are at the Core of the Majority of Crises

Since 1994, the Institute for Crisis Management has been tracking the types of crises that strike organizations. The consulting firm’s 2010 annual report noted that 50 percent of all reported crises originated with management and 32 percent were

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initiated by employees (Institute for Crisis Management, 2011). Corporate scan- dals, mismanagement, and other forms of white-collar crime contribute to the high percentage of management-induced crises. What is disturbing about these findings is that the majority of these crises need not occur in the first place. Unlike externally induced crises such as hurricanes or natural disasters, human-induced crises often emanate from poor examples set by top management (Carroll & Buchholtz, 2003; Hartley, 1993). When lower-level employees are not sure how to react in a certain situation, they look to their leaders for guidance. Hence, problems can arise when ethics is lacking at the top, leading to the spread of crises throughout the organiza- tion. Because this area of crisis management is complex, Chapter 10 of this book is devoted to the ethical implications of organizational crises. The remainder of this section examines human-induced crises in terms of workplace violence, human error and normal accident theory, and sloppy management.

Workplace Violence

Human-induced crises include various forms of workplace misbehavior. Griffin and Lopez (2005, p. 988) coined the term “bad behavior” to refer to those actions that are potentially injurious to the organization and/or its members. They fur- ther classified bad behavior into four categories: deviance, aggression, antisocial behavior, and violence. Workplace deviance includes behavior that violates the accepted norms of the organization. Organizational deviance is composed of actions taken against the company and includes leaving early, wasting resources, stealing, and sabotaging equipment. Interpersonal deviance is directed toward another individual in the workplace and can include verbal abuse, gossiping, and sexual harassment (Diefendorff & Mehta, 2007). Workplace aggression is assertive and threatening behavior that is directed toward a person or an object but is non- physical in nature. Consider a terminated worker who verbally threatens his super- visor. Management should always be concerned about verbal threats because they can signal a potential physical assault. Antisocial behavior is a set of behaviors that can produce physical, economic, psychological, or emotional harm (Robinson & O’Leary, 1998). This behavior is manifested when an employee is not sociable with others and/or is hostile and disruptive to organizational norms (Griffin & Lopez, 2005). Once the behavior becomes physical, it is considered workplace violence (O’Leary-Kelly, Griffin, & Glew, 1996).

Of the behaviors described by Griffin and Lopez, workplace violence generates the most attention in the field of crisis management. In recent years, there has been an abundance of research on workplace violence. A personality profile of a potential killer in the workplace has been identified, new security procedures have been enacted in organizations, and better screening devices are in place to identify applicants who may be prone to violence. Nevertheless, workplace violence con- tinues to be a problem in the crisis management landscape, as a number of such events have occurred across the nation. One of the more common scenarios is for a disgruntled or recently terminated employee to return to the workplace and seek revenge on a former supervisor. Unfortunately, such scenarios often result in multiple fatalities.

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Human Error and the Normal Accident Theory Problem

In addition to unethical decisions and the “bad behaviors” described, human- induced crises also include employee or operator errors, which are a major contribu- tor to industrial accidents. Errors of this kind occur when the work environment is both complex and “tightly coupled.” Charles Perrow (1999) suggested that such a scenario can lead to a “normal accident.” Tight coupling can be understood by con- sidering the interdependence that exists among departments, units, teams, and other groups within an organization. The higher the interdependence (i.e., the more the departments depend on each other in order to function), the more tightly the depart- ments are coupled. If the departments can exist within the organization but are not highly interdependent, then they are loosely coupled. For example, in a restaurant, the service staff and the cooking staff are tightly coupled because one group cannot adequately function without the other. If the chef and several cooks were suddenly to become ill, a major crisis would ensue, and the restaurant might have to close, albeit temporarily. However, the relationship between the cooks and the cleaning staff of dishwashers is more loosely coupled. The restaurant can survive if there is a shortage of dishwashers, even if the cooks have to take over this function temporarily.

This example considered the notion of interdependence within an organization. However, the concept of coupling also involves entities outside of the organization, a phenomenon that has increased with the notion of partnerships and strategic alli- ances. Consider that some of the organization’s suppliers are more tightly coupled with the company than others. Tightly coupled suppliers must be available to make regular deliveries with the full order and in a timely fashion if the business is to perform well. In a restaurant, food suppliers are tightly coupled to the organiza- tion, whereas suppliers of paper and cleaning goods, although important, are more loosely coupled. A crisis can develop when an entity that is tightly coupled, either within the organization or outside of it, is temporarily incapacitated. The other groups aligned with that unit are now also part of the crisis. For example, in a just-in-time (JIT) work system, if a major supplier cannot make the delivery, the assembly line will shut down because there is very little slack built into the system. If the delay continues, the company may have to suspend operations temporarily. This is not a hypothetical example, but one that plays itself out every time there is a substantial disruption in a supply chain. Major industrial fires, earthquakes, terrorism, wars, and tsunamis can initiate a crisis of this sort because these events can disrupt supply chains. Indeed, in today’s JIT-oriented society, supply chains are vulnerable due to the tight coupling that exists among supply chain partners (Zsidisin, Ragatz, & Melnyk, 2005).

Perrow’s original contributions to normal accident theory were aimed at address- ing technologies that create both complexity and tight coupling for the user who must operate these technologies. In such a situation, an employee error can create a major crisis. Perrow (1990) believed that user errors of this sort were inevitable in certain facilities, such as chemical and nuclear power plants (Choo, 2008). The March 28, 1979, near-meltdown of a reactor at the Three Mile Island nuclear power facility outside of Harrisburg, Pennsylvania, illustrated how a normal accident might pan out (Hopkins, 2001). In this incident, nuclear plant operators were at a loss to explain

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both what triggered the accident and what to do about it (Barton, 2001). The plant met the conditions that Perrow had outlined; it was complex and tightly coupled. The sheer complexity of the facility made it difficult to identify actions needed to remedy the problem. The plant was tightly coupled in that changes in one subsystem would affect the rest of the system as well. In fact, one of the initial means used by operators to control the rising temperature in the reactor core was to shut down high-pressure cooling pumps (Hopkins, 2001). Ironically, leaving pressure pumps on would have alleviated the problem, a tight coupling phenomenon. Although this example has its roots in technology, it is also a case study on how human error can intensify a crisis.

Sloppy Management

Previous to Perrow’s normal accident theory, Turner (1978) maintained that human-induced crises are caused by what he called “sloppy management.” Whereas Perrow (1990) blamed human error on technological factors, Turner maintained that it is ultimately caused by poor management and the systems in which they function. One of the characteristics of sloppy management is the failure to heed warnings from previous problems (Hopkins, 2001). In other words, managers are presented with warning signs, but they fail to act upon them, which ultimately leads to a crisis. The September 11 terrorist attack on the World Trade Center in New York City has been framed in this light (9/11 Commission, 2004). Sloppy manage- ment has also been linked with groupthink, a phenomenon in which poor decisions are made by groups because of a desire to appear united and cohesive (Janis, 1982). In fact, failing to heed warnings can be a by-product of groupthink because nobody in the group wants to be viewed as an alarmist.

Choo’s (2008) work offers three explanations as to why warnings are not heeded by management: epistemic blind spots, risk denial, and structural impediments. An epistemic blind spot occurs when warnings are not acted on because the informa- tion does not fit an existing frame of reference. Put another way, information is selectively interpreted to fit what we generally accept as true. For example, prior to Enron’s bankruptcy in 2001, Enron’s board evaded the warnings that were surfac- ing about the means by which the firm was accounting for its assets and holdings on its financial statements. The board’s perception, instead, was that this type of disclosure was just a normal part of conducting business (Choo, 2008).

Unlike blind spots where the warning is completely missed, risk denial is a mind-set that acknowledges the reality of the warning, but the norms and culture of the organization dictate that no response is necessary. This is one of the most perplexing matters related to crisis management because so many of the crises that we study could have been avoided if the appropriate decision maker(s) had acted on clear warnings. A common theme that seems to run through the minds of many managers is the “It can’t happen to us” mentality. Thus, the top management team thinks its organization is impermeable and crises happen only to other firms.

The third item, structural impediments, prevents management from acting on warnings because there are structural imperfections within the organization. Unlike risk denial, when the warnings are acknowledged but not considered important, structural impediments hinder warnings from being addressed at all, even when

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management believes they are legitimate. Choo (2008) cites the example of a five- year-old boy who was admitted to a hospital for elective neurosurgery. Despite the surgery going well, the boy developed complications and seizures. Unfortunately, there was a structural impediment in that no single physician was designated to be responsible. The patient care was established with a research physician, a neurologi- cal resident, a neurosurgeon, and an attending physician at the hospital, but nobody took ownership of the case (Snook & Connor, 2005). Eventually, the boy’s condi- tion worsened to the point where he stopped breathing. In this example, everyone agreed that the warnings were serious, but the structure of the situation meant that nobody was really in charge, a prescription for a crisis.

Environmental Damage and Sustainability of Resources Cause Crises to Have a Global Impact

Two separate but related issues can result in environmental concerns. Sustainability seeks economic growth while ensuring that natural resources are available for the next generation of users (Stead & Stead, 2004). Sustainability is a trend that is to be encouraged in the business environment. But environmental damage due to an accident or deliberate exploitation is to be discouraged. While this may appear obvious, the reality of how many companies, particularly in devel- oping countries, operate seems to contradict what should be clear: Do not destroy the environment needlessly.

Prior to April 2010, the Exxon Valdez oil spill was the proverbial poster child for an oil company’s worst environmental and public relations nightmare. In 1989, the Exxon Valdez tanker hit a reef in Alaska’s Prince William Sound, spilling approxi- mately 10.5 million gallons of oil. Although there was no loss of human life, the loss of animal and bird life was extensive, and the negative press was daunting. The company’s untested crisis management plan assumed that a spill could be contained in five hours. Unfortunately, due to bureaucratic and weather delays, efforts to con- tain the spill were not implemented for two days (Hartley, 1993). The onslaught of media coverage was brutal, putting Exxon in a negative light throughout the world.

Unfortunately, BP surpassed Exxon in terms of severity on April 20, 2010, when its deep-water oil well was in the final stages of being capped. A surge of gas emerged from the seabed and blew past the containment apparatus that was sup- posed to suppress it. The resulting blast killed 11 workers and caused the largest off- shore oil spill in U.S. history (Crooks, Pfeifer, & McNulty, 2010). The accident and recovery efforts were quickly known worldwide, and BP remained in the headlines for months afterward. During the capping of the oil spill, viewers on the Internet could watch in real time as efforts were made to stop the flow of oil, a phenomenon that reinforced the power of the Internet and social media.

Some may think that environmental crises only occur in large manufacturing companies or those that process oil. However, service industries are also under scrutiny. Fast-food giant McDonald’s found itself in the middle of an environmen- tal quagmire in the early 1990s. The problem was that excessive packaging of menu items was bulky and a potential landfill problem. Fortunately, the company met

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voluntarily with members of the Environmental Defense Fund (EDF) over a period of a year to discuss what could be done (Sethi & Steidlmeier, 1997). The result was a major revamping of packaging practices that not only reduced the Styrofoam used but also placed McDonald’s in a favorable light among environmentalists. What could have been a potential public relations crisis was handled proactively by the company, with a cost savings to the firm as an added benefit (Sethi & Steidlmeier, 1997). This is a critical issue for large firms like McDonalds because industry lead- ers tend to be targets of efforts designed to promote an environmental agenda.

On a more positive note, sustainable development has been a familiar buzzword within business and government entities since the early 1990s. Proceeding with economic growth while maintaining the integrity and resources of the environment are necessary for the well-being of local societies at the micro level and humankind at the macro level. Two scenarios exist involving crises and sustainable development (Crandall & Mensah, 2008). First, a sudden environmental crisis can impair the sustainability of certain resources in the long term. For example, a crisis event such as an oil spill can negatively influence the long-term survivability of the seafood industry in the affected area. The 2010 BP oil spill in the Gulf of Mexico and the 1989 Exxon Valdez spill off the coast of Alaska illustrate this scenario and depict events that are both sudden and unexpected. In the second scenario, the events occur slowly in a more organized fashion. For example, the steady growth of a firm (and on a larger scale, a society) can gradually deplete renewable resources faster than they are being replenished. It is these slower types of economic growth that are of special importance in sustainability. Water, air, and land are noticeable resources that have been used negatively—depleted or contaminated—by various businesses, industries, and even societies.

Sustainable development is likely to become even more newsworthy in the future as continued attention is focused on the depletion of renewable resources. Companies and even countries that are perceived to be detractors to sustainable development will be viewed in a negative light, which can lead to an array of public relations crises. Emerging countries in particular have been the target of criticism because of their ability to hinder sustainability efforts (Parnell, Spillan, & Lester, 2010). One country in particular that has seen its share of negative press is the People’s Republic of China, where two concerns have been repeatedly voiced concerning environmental practices. First, its pollution is crossing its borders into Japan and Korea in the form of acid rain. Second, China’s inability to enforce basic environmental regulations has resulted in lower production costs for Chinese manufacturers when compared to competitors in other countries. Critics charge that such actions put millions of people out of work and depress wages in other nations that have more stringent regulations (Navarro, 2007).

Concern for the environment remains a high priority in the crisis management landscape. Companies must not only work to prevent environmental damage, but they should also portray to the public their efforts to be champions of sustainable development. Indeed, companies are evaluated to a large extent in terms of how much they support or ignore sustainability management (Coombs, 2010). Even today, McDonald’s provides leaflets in their restaurants (on recycled paper) that outline what they are doing to use environmental resources wisely. In addition,

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municipalities, states, and entire countries will need to do their share to protect the environment and ensure that resources are available for future generations. Indeed, the cost of damaging the environment needlessly while not promoting sustain- ability will create a twofold crisis. In the short run, a public relations crisis results in which external stakeholders view the offending entity negatively. In the long run there is a deeper problem: damage to the environment and the cavalier attitude that resources exist only for the whims and consumption of the current generation.

Globalization Increases the Risk of Organizational and Societal Crises

Globalization refers to the development of economic interdependence among nations. Its existence is undeniable, although debates abound concerning the extent to which its effects are positive or negative. In practice, globalization creates both positive and negative outcomes. One conclusion is clear: globalization has created an environment in which crisis events are more likely to occur.

Global outsourcing is a strategy associated with the proliferation of globaliza- tion. This term refers to contracting out a firm’s noncore, non–revenue-producing activities to organizations in other nations primarily to reduce costs. Many con- sumers and activists have become increasingly disturbed about job losses that occur when a firm moves a production facility abroad or a retailer stocks its shelves with imported products (Ansberry & Aeppel, 2003). A number of American firms have closed production facilities in the United States and opened new ones in Mexico, China, India, and other countries where labor costs are substantially lower (Dean, 2004; Luhnow, 2004; Millman, 2004; Morse, 2004). For example, China, Mexico, Honduras, Bangladesh, and El Salvador account for a substantial amount of imported apparel in the United States. Analysts also suggest that differences in wages could spark increased global outsourcing in a broad array of professional and technical fields, such as architecture, medical transcribing, and accounting (Buckman, 2004; Maher, 2004).

In the discussion that follows, we focus primarily on the impact that global out- sourcing has on causing crisis events. The scope of the coverage looks at outsourc- ing’s relation to operational control problems, fragile supply chains, reputational crises, and a new development, the movement toward bringing production back to the host country, a process known as reshoring .

Operational Control Problems

When an organization chooses to allow business functions to be completed by other organizations, it inevitably loses some control over these functions. In addi- tion, when outsourcing involves partner firms across borders, the organization must contend with the political, legal, and other international influences associ- ated with its partners. Union Carbide’s Bhopal, India, disaster was one of the first crisis events to illustrate what can happen when partners in other countries do not maintain the same standards as those in the home company. In 1984, gas leaked

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Chapter 2. The Crisis Management Landscape 41

from a methyl isocyanate (MIC) tank at a Union Carbide plant in Bhopal, initially killing more than 2,500 people and injuring another 300,000. The plant was jointly owned and operated by parties in India and in the United States (49.1 percent was owned by the Indian stakeholders, the rest by Union Carbide in the United States). Inadequate safety practices, equipment failures, and careless operating procedures contributed to the disaster, which was caused when water accidentally entered Tank 610, which held the deadly gas (Hartley, 1993).

Herein lay the heart of the dilemma: outsourcing relinquishes control of the production of a product (Zsidisin, Meinyk, & Ragatz, 2005). This can be benefi- cial when the outsourcer has expertise in the field and is better equipped to per- form a particular task, but one of the dilemmas of any outsourcing relationship is the potential gap between the quality that is expected and the quality that is pro- vided. When cultural differences between partners create different expectations of quality, this gap becomes problematic. Clarifying specifications in purchasing contracts can reduce—but not always eliminate—this problem of quality. There are other issues that may not be addressed in an outsourcing relationship, such as how well the outsourced facility is maintained in terms of cleanliness and equipment functioning abilities. In other words, purchasing contracts usually look at the final product, but not necessarily the functional capabilities of the production facility.

The accident at Bhopal illustrates how a push for globalization and outsourc- ing can lead to a devastating crisis. Safety standards were not being met in the manufacturing of the deadly MIC gas. Control of these standards and equipment maintenance at the plant were in the hands of the Indian owners, under an elaborate arrangement called Union Carbide (India) Limited (Sethi & Steidlmeier, 1997). One might liken this situation to giving a toddler a loaded gun. As business ethicist Robert Hartley (1993) states, “A laissez-faire decentralization is not appropriate in underde- veloped countries when safety and environmental degradation are at stake” (p. 156).

The Problem of Fragile Supply Chains

There are two subtrends that have been occurring in the world’s supply chains. The first is global outsourcing; the second is the movement toward lean manage- ment and its accompanying emphasis on leaner supply chains and single sourcing (Crandall, Crandall, & Chen, 2010). Both trends make supply chains more vulner- able to external shocks that can interrupt a firm’s supply lines. “Specifically, today’s lean supply chains are becoming increasingly—‘fragile’—that is, less able to deal with shocks and disruptions that can have a significant, if not catastrophic, impact on the firm” (Zsidisin, Ragatz, & Melnyk, 2005, p. 46). Because companies are car- rying less inventory, interruptions in the supply chain due to a crisis event can grind production to a standstill.

Single sourcing is another important practice. Unfortunately, when a company’s key vendor is hit with a crisis, the companies it supplies will be affected as well. The same is true with vendors that supply daily deliveries of product. An interruption in the delivery schedule can halt production immediately. For a dramatic example of the impact of a crisis on a single supplier, consider the fire that took out the main

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production facilities of Philips Electronics in early 2000. Philips supplies radio- frequency chips (RFCs) to cellular phone makers. The crisis caused a $400 million revenue loss for the telecommunications company, Ericsson, and eventually led to its exit from the cellular telephone industry altogether (Rice & Caniato, 2003).

Cisco, the San Jose, California–based provider of networking and communica- tion systems, appears to understand the risks of supply chain disruptions, because 95 percent of its production is outsourced (Harrington & O’Connor, 2009). Because most of its supply chain is global in nature, the company has adopted a program to move away from single sourcing (a common practice with many companies) to multiple sourcing. Indeed, such planning was important when on May 12, 2008, a 7.9 magnitude earthquake hit the Sichuan province of China, a region at the heart of Cisco’s supply chain for that region of Asia.

Reputational Crises

A number of American firms—including Nike and Wal-Mart—have been fight- ing crisis events of their own, such as negative publicity and boycotts resulting from their ties to countries where labor costs are much lower. Wal-Mart critic Arindrajit Dube suggested that Wal-Mart’s relatively low wages emanating from its promotion of outsourcing result in an annual wage loss in the retail sector of almost $5 bil- lion. Hollywood’s Robert Greenwald produced a movie about the giant retailer— WAL-MART: The High Cost of Low Price —chronicling the plight of an Ohio-based hardware store when Wal-Mart moved to town (York, 2005). The net effect of this sentiment against Wal-Mart is unclear, and not all press has been negative. As Jason Furman of New York University notes, Wal-Mart’s economic benefits cannot be ignored; the retailer saves its customers an estimated $200 billion or more on food and other items every year (Mallaby, 2005).

Public opposition to outsourcing can harm public sentiment and weaken cus- tomer loyalty for firms directly or indirectly involved. Wal-Mart is often the brunt of criticism from politicians, activists, and union leaders. Detractors, for example, contend that the retailer giant’s aggressive negotiating tactics ultimately decimate American manufacturers and send American jobs overseas (Fishman, 2006). Some critics charge that Wal-Mart seeks to destroy small businesses in the communities in which it operates (Edid, 2005; Quinn, 2000). Others, however, cite positive influ- ences, noting such factors as job creation and the benefits of low prices to consum- ers (Etter, 2005; York, 2005).

Outsourcing from firms in the United States has resulted in a substantial num- ber of U.S. jobs going overseas. Consider the case of India. General Electric’s (GE) Jack Welch was instrumental in one of the earliest partnerships with the populous Asian nation. Welch first met with the Indian government in 1989, and GE formed a joint venture to develop and market medical equipment with Wipro Ltd. in 1990. By the mid-1990s, much of GE’s software development and maintenance activities had been shifted to Indian companies. GE Capital Services (GECIS) established the first international call center in India in 1999. GE sold 60 percent of GECIS for $500 million in 2004, freeing it to compete against IBM, Accenture, and Indian firms. In 2005, India received more than $17 billion from foreign corporations seeking

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Chapter 2. The Crisis Management Landscape 43

to outsource a variety of jobs (Solomon & Kranhold, 2005). The number of legal outsourcing firms in India has grown from 40 in 2005 to more than 140 at the end of 2009. Revenue at India’s legal outsourcing firms is expected to grow to more than $1 billion by 2014 (Timmons, 2010) . The argument for such outsourcing is simple: reduced operational costs. According to one analyst, the cost of developing a par- ticular legal database for contracts might be about $60,000 in the United States, but only about $5,000 in India (Bellman & Koppel, 2005).

Of course, it is inappropriate to note the job losses associated with outsourcing from a given nation without also considering job gains that come from outsourcing that occurs in other nations. Nonetheless, the outsourcing debate illustrates how strategic decision making can later lead to an organizational crisis. The pressure to lower costs is overwhelming. Global competition has forced many businesses to look for ways to cut costs, and global outsourcing is one such option. But there is a dark side to this decision that can backfire on the organization: negative public- ity. Entire books have been written on the subject, and emotions often run high because outsourcing does lead to a loss of jobs, at least in the short run. Television commentator Lou Dobbs has charged that corporate greed is behind the job losses because it is the company that purposely chooses to outsource jobs over- seas (Dobbs, 2004). While it is convenient and simplistic to invoke the “corporate greed” argument, the reality is more complex. In the long run, social critics must acknowledge that consumer demand is what generates revenues, and consumers want low prices (Shell, 2010). While it may sound noble and patriotic to retain jobs in a country like the United States, these jobs will not exist if the company can- not survive in the long run. To do so, cost cutting must occur because consumers demand low prices and competition is intense; this results in strategic decisions in favor of global outsourcing. Hence, like it or not, global outsourcing is a trend that is utilized to ensure long-term company survival based on the consumer’s desire for low-cost goods.

Some firms have attempted to avoid the publicity crises associated with the out- sourcing controversy. A number of companies have become more sensitive to the public disapproval that outsourcing can bring to their companies or organizations. An interesting case occurred in 2004 when e-Loan announced that customers would be given a choice to have their loan applications processed in Delhi, India, or Dallas, Texas. Although Dallas was considered the more patriotic choice for American consumers, it would also take two days longer than the Delhi option (Drucker & Brown, 2004). Hence, the outsourcing debate remains a key consideration for consumers and organizations alike, and its potential for creating publicity-oriented crises should not be underestimated. However, despite the enthusiasm for global outsourcing among many businesses, there are some who are viewing the cost factor in a different light, as the next section illustrates.

The Reshoring Movement

Within the external landscape, there is a movement afoot to bring manufactur- ing back to the United States from countries where it is currently outsourced, a pro- cess called reshoring . This movement acknowledges the weaknesses of the current

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offshoring model, but with one significant addition: The dollar costs of offshoring are not always calculated well when managers make their decisions to move produc- tion overseas to begin with. When one considers the declining value of the dollar in the late 2000s and early 2010s, it becomes clear that manufacturers that use global outsourcing may be paying more than they initially anticipated (Cable, 2011).

A key player in the reshoring movement is Harry Moser, who maintains that the costs of global outsourcing should follow a total cost of ownership model (Markham, 2011). The model includes calculating all costs associated with making the product, including costs that are often overlooked by managers. These include risk factors such as the stability of the country, the loss of business due to poor quality, the economic stability of the supplier, and loss due to lack of innovation. More traditional costs are also included such as transportation and holding costs, damage to product while en route, and duty fees. An Archstone Consulting 2009 survey revealed that 60 percent of manufacturers use “rudimentary total cost models” and ignore 20 percent of the cost of offshoring (Moser, 2011). As a result, Moser claims that most companies that offshore consider only the price of the product, and perhaps three or four other cost factors (Markham, 2011). He argues that such a perspective is incomplete.

One factor that also must be considered is the convergence of labor rates in the United States and other countries, such as China. As labor costs rise in popularly outsourced countries, the playing field levels when the total cost of ownership is compared across countries. Over time, the cost gap between a product produced in the United States and one produced in China narrows (Sprovieri, 2011). As more people become aware of the non–job-related costs of moving production overseas, additional pressure may be put on companies to bring production back to the home country. Hence, the cost of reshoring is about both costs and patriotism, at least in the eyes of those who support the reshoring initiative.

As we can see, globalization in general and the global outsourcing strategy in particular have spawned a number of crisis threats. In production management, the move to outsource at the local level has traditionally been motivated by locating a vendor with a complementary strategic capability. For example, many companies outsource the food service function to a specialty firms better equipped to provide the service. Likewise, they may outsource the manufacture of a particular compo- nent to a nearby firm with appropriate expertise. This has been the model in the auto industry for years. However, when a company resigns its role as a manufac- turer in favor of outsourcing production to a company in an emerging country, the motivation is usually associated with costs. As Shell (2010) contends, however, what is often at stake is more than just lower costs, but quality, safety, environmental responsibility, and human dignity.

Summary

This chapter examined six major trends in the crisis management landscape, each of which contributes to the proliferation of crisis events that organizations must face. For each trend, a tradeoff exists between the external environment and the

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Chapter 2. The Crisis Management Landscape 45

degree of influence that management can exert in its strategic planning efforts. Management has the most strategic influence in its decisions to undertake global- ization initiatives. The least amount of control can be seen in addressing trans- boundary crises. Understanding these trends is useful as we examine the origins of crises, the topic of the next chapter.

Questions for Discussion

1. What is a transboundary crisis?

■ What are the four characteristics of a transboundary crisis? ■ What are some examples of transboundary crises?

2. How far should companies go in preparing for acts of terrorism? How much preparation is too much? Explain.

3. How can the Internet add to the severity of a crisis? Provide examples.

4. What types of human-induced crises have occurred where you work?

5. What is a normal accident? What conditions can contribute to this type of event?

6. What is sustainable development? What is its association with crisis events?

7. How has globalization contributed to an increase in crisis events?

8. What can companies do to decrease the risk of a crisis involving global outsourcing?

Chapter Exercise

The six trends in this chapter have been carefully researched to reflect the latest factors that lead to organizational crises in the strategy landscape. Although the trends are discussed individually, they overlap as well. In this exercise, the class should form six groups, with each group representing one of the trends discussed in the chapter.

Each group should create a list of examples of crises that originate from its respective trend. (This part can be done outside of class.) The lists should then be posted in the classroom so that members of all six groups can view each group’s examples. Once the class has reconvened, identify the examples that seem to tran- scend other categories. For example, a transboundary crisis can also have roots in the globalization movement, and so on.

Discuss as a class how the organization can exert more strategic control in miti- gating a future crisis that is linked to multiple trends.

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Opening Case, Part 2: How a Distance of 10 Feet Can Be Fatal

The U.S. Chemical Safety and Hazard Investigation Board investigated the accident at the Little General Store in September 2008 and issued an 84-page report on the incident. Not surprisingly, the board found that the location of the propane tank adjacent to the building contributed to the explosion (CSB, 2008). However, the propane tank under question had been allowed to remain in its location for 11 years. Records indicate that the tank was installed in late 1994 against the back wall of the Little General Store by the then-Southern Sun Company (CSB, 2008). It was not until that fateful day on January 30, 2007, when the old tank was to be decommissioned, that a new tank would be located at the required 10-foot distance level. Ironically, it was this move to secure a safer location that led to the explosion.

The board identified a second factor in the accident. The junior technician was not properly trained to conduct a liquid propane transfer. In addition, he was work- ing alone when he attempted to remove the plug from the propane tank. OSHA regulations require that an attendant be present during the transfer and that the technician be properly trained to undertake such a transfer (Busick, 2010).

The report also noted that although propane had seeped into the store and was noticed by employees because of its odor, no evacuation ever took place. Propane is an odorless liquid and must be given a characteristic odor so it can be detected at one-fifth of its explosive limit (Busick, 2010).

The board also uncovered a defect in the propane tank itself; a withdrawal valve positioned underneath the outer plug was stuck in the open position. Hence, when the junior technician attempted to remove the outer plug, the propane escaped unabated. Under normal circumstances, removing the plug should not release any propane. However, as a safety requirement, the plug has a slot that releases a small amount of propane when the plug is partially opened. This device is meant to signal to the technician that the valve underneath is stuck and the outer plug must be replaced. Unfortunately, the junior technician had not been trained on how to remove the outer plug properly, or to note that a small amount of escaping gas indicates a problem with the withdrawal valve. Instead, the technician completely removed the plug, which allowed the propane to escape under high pressure (CSB, 2008). At that point, it was not possible to replace the outer plug, and the gas escaped freely for nearly 20 minutes.

A complete evacuation of the building and the surrounding area should have occurred. Instead, emergency personnel and employees were located in areas laden with propane fumes. At 10:53 A.M. , the propane encountered a flame from a pizza oven, an electrical spark, or another source of ignition. The trigger to the explosion was never identified.

An added irony in this case was that Appalachian Heating was working with a competitor’s tank. That tank, owned by Ferrellgas, had to be disconnected so that Appalachian could connect its tank to the building. Ideally, a liquid transfer by which the propane is transferred safely to another tank should be done in a bulk

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Chapter 2. The Crisis Management Landscape 47

plant. However, that process can be done in the field if the proper safety precautions are met and the technicians are trained (Johnston, 2008). Unfortunately, that was not to be the case in this incident.

Greg Darby is the owner of the Little General Stores and acknowledges it was one of the worst days of his life. “It was a tough day. We went out there, and it was completely gone. It was scary. We didn’t know what happened or who died. It was the most difficult thing” (Lannom, 2012, p. 9). Darby grew up in Beaver, West Virginia, only a few miles from the ill-fated Little General Store. He graduated from West Virginia University with a degree in accounting. His first job was with Little General as an accountant, and he has remained there for his entire career. When he first started with the company, the chain had only eight stores; today, it has more than 100. Today, a memorial to the victims of the tragedy sits in the location where the Little General once operated.

Opening Case Part 2 Case Discussion Questions

1. What steps should be taken to ensure that proper training occurs for employees working with hazardous substances?

2. In this accident, which organizations are potentially liable for the explo- sion? List these in order of priority and discuss your reasons.

Opening Case Part 2 References

Busick, J. (2010, October 1). Propane: This common fuel can be uncommonly deadly. Safety Compliance Letter, Issue 2518, 5–6.

CSB. (2008, September). Investigation Report: Little General Store—Propane Explosion. U.S. Chemical Safety and Hazard Investigation Board. Retrieved July 29, 2012, from http:// www.csb.gov/assets/document/CSBFinalReportLittleGeneral.pdf.

Johnston, J. (2008). Know the safety situations. LP/Gas, 68 (11), 32. Lannom, A. (2012). Darby’s stores have gone through triumphs, tragedy. Who’s Who in West

Virginia Business Award Winner, 8–9.

References

Ali, S., & Ali, A. (2010). A conceptual framework for crisis planning and management in the Jordanian tourism industry. Advances in Management, 3 (7), 59–65.

Ansberry, C., & Aeppel, T. (2003, October 6). Surviving the onslaught. Wall Street Journal, pp. B1, B6.

Ansell, C., Boin, A., & Keller, A. (2010). Managing transboundary crises: Identifying the building blocks of an effective response system. Journal of Contingencies and Crisis Management, 18 (4), 195–207.

Barton, L. (2001). Crisis in organizations II. Cincinnati: South-Western. Bellman, E., & Koppel, N. (2005, September 28). More U.S. legal work moves to India’s low-

cost lawyers. Wall Street Journal, pp. B1, B2. Bernstein, J. (2006). Who are those bloggers and why are they saying those terrible things?

Associations Now, 2 (11), 58–61.

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CHAPTER 3

Sources of Organizational Crises

Opening Case: Kleen Energy Gets Into a Dirty Explosion

February 7, 2010, was supposed to be a countdown day for the opening of the Kleen Energy power generation plant in Middletown, Connecticut. Instead, an explosion rocked the facility, leaving six workers dead and 50 more injured. The cause of the explosion was traced to a controversial practice known as a “gas blow,” a process whereby natural gas is pumped under high pressure through pipes that feed the turbines that generate electricity (Smith, 2010). As the natural gas was pumped through the pipes, it was vented outside into the open air, a practice that is highly dangerous if there is an ignition source in the area such as an open flame or an electrical spark. During the operation, welding and other construction work was taking place near the area where the gas was dispersed. The fatal explosion occurred at 11:15 A.M ., when the gas encountered an ignition source.

Landscape Survey Strategic Planning Crisis Management Organizational

Learning

The Internal Landscape

The External Landscape

Chapter 10: The Underlying Role of Ethics in Crisis Management

Chapter 9: The Importance of Organiza- tional Learning

Chapter 8: Crisis Communi- cations

Chapter 7: Crisis Management: Taking Action When Disaster Hits

Chapter 4: A Strategic Approach to Crisis Management

Chapter 6: Organiza- tional Strategy and Crises

Chapter 2: The Crisis Management Landscape

Chapter 3: Sources of Organiza- tional Crises

Chapter 5: Forming the Crisis Management Team and Writing the Plan

Crisis

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52 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

The facility was one of a new generation of power plants that utilize gas instead of coal to generate electricity. Such plants use a “combined cycle” approach to power generation, combusting natural gas to run the turbines while any heat generated is retrieved and used to run a steam turbine. The Kleen Energy plant is equipped with two gas and one steam turbine (U.S. Chemical Safety Board [CSB], 2010) . The advantage of this type of plant is lower pollution.

When a new gas-operated power plant is constructed, a procedure to clean the gas lines that feed into the large turbines is necessary because the turbine blades are delicate and cannot come into contact with dust and debris. When construction occurs and the gas lines are new, however, it is common for sediment to reach the blades. The makers of turbines require that gas lines be cleaned as a condition of honoring the warranty (Smith, 2010).

There are several ways that lines can be cleaned. The most popular method is to use natural gas because it is readily convenient and does not require purging the lines before final installation. In a survey conducted by the U.S. Chemical Safety Board, 37 percent of the respondents indicated they used natural gas as the pre- ferred method of cleaning lines (CSB, 2010). However, this method is also the most dangerous because of the risk of encountering an ignition source. Other alternative methods of cleaning gas lines include using water, steam, nitrogen, or compressed air, all of which are safer and not flammable (Benner, 2010).

An article in Fortune (“Anatomy,” 2010) unfolds the chronology of the events that fateful morning of the accident:

6:00 A.M. to 7:00 A.M.: The construction company, O&G Industries, does not hold a safety meeting to indicate that a series of gas blows will be conducted during the morning. As a result, potential ignition sources such as open-flame heaters, welding equipment, and electricity are all left operating near the area where the gas will be vented. 7:00 A.M. to 9:00 A.M.: The gas lines that run to Turbine 2 are cleared out using a series of eight gas blows. Each blow is preceded by a warning horn. The gases are vented outside in the open air and no incidents are reported. 10:30 A.M. to 11:15 A.M. : Workers in the area notice a strong smell of natural gas, perhaps indicating that the gas is not dissipating well. 11:00 A.M.: The gas blow begins on Turbine 1, but no warning horn is sounded. The gases are vented within 15 feet of the ground. 11:15 A.M.: An explosion occurs, followed by a fire.

Although the cause of the accident was natural gas encountering an ignition source, the source was never identified.

Two different organizations investigated the accident, and although their findings were identical as to the cause, their recommendations were different. Both the U.S. Chemical Safety Board and the Occupational Safety and Health Administration (OSHA) found the practice of using natural gas to clean out pipes as hazardous to the safety of nearby workers. However, while the CSB advised prohibiting the practice altogether, OSHA stopped short of making the same rec- ommendation. OSHA has the legal power to issue fines, while the CSB does not.

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Chapter 3. Sources of Organizational Crises 53

OSHA levied a $16.6 million fine on the companies involved and identified 371 workplace violations at the worksite. The largest fine of $8.35 million went to O&G Industries for 119 willful and 17 serious violations (Smith, 2010). According to Dr. David Michaels, assistant secretary of labor for OSHA, “These employees blatantly disregarded well-known and accepted industry procedures and their own safety guidelines in conducting the gas blow operation in a manner that exposed workers to fire and explosion hazards. . . . We see this time and time again across industries when companies deliberately ignore safety precautions in the interest of completing jobs quickly, and workers end up being killed or seriously hurt” (“$16.6 million in fines,” 2010, p. 16). Completing the job quickly, as mentioned by Dr. Michaels, was indeed a consideration in the accident. Stipulated in the contract was a $14 million bonus to O&G Industries if the plant was completed early (Benner, 2010).

Opening Case Discussion Questions

1. Are you aware of other examples in which a contractor sacrificed worker safety in the building of a construction project?

2. The U.S. Chemical Safety Board can only make recommendations and not issue fines. Why, then, is this board considered to be influential in the industry?

3. This case mentions that completing a project early can result in a bonus to the contractor. How does the use of gas blowing speed up the completion of a project like this one? Discuss the appropriateness of financial payoffs in contracts that are linked to completing projects ahead of time.

Opening Case References

Anatomy of a catastrophe. (2010, September 27). Fortune, 101. Benner, K. (2010, September 10). The fatal deal. Fortune, 99–106. Chemical Safety Board. (2010, May 19). Pipe cleaning practices that led to Kleen Energy

explosion are common across gas energy industry, survey data shows. Retrieved July 28, 2012, from http://www.csb.gov/newsroom/detail.aspx?nid=319.

$16.6 million in fines for fatal Connecticut explosion. (2010, September 26). Industrial Safety and Hygiene News, 44 (9), 16.

Smith, R. (2010, August 6). “Unsafe” cleaning with gas allowed. Wall Street Journal, p. A4.

Introduction

Crisis events such as the one at Kleen Energy have sources; they are not merely random events. One must understand these sources before steps can be taken to avoid subse- quent crises. Likewise, practitioners and management scholars often view the external environment in terms of general forces that originate from four areas: political–legal, economic, social, and technological (PEST). These four areas are not only consistent in

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54 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

strategic analysis but also lay the groundwork for examining the external landscape for crises. In this chapter, we examine each of these four forces in detail and discuss their relationships to origins of a crisis. We also review the industry and organizational life cycles and their applicability to effective crisis management.

Crises and the External Environment

Every organization exists within a complex network of political–legal, economic, social, and technological forces, as depicted in Figure 3.1. Together, these elements make up the organization’s external environment, also called the macroenviron- ment . Changes in any of these realms can increase the likelihood of a crisis.

Political–Legal Forces

Political–legal forces include the outcomes of government leader decisions, the impacts of existing and new legislation, and judicial court decisions, as well as the decisions rendered by various regulatory commissions and agencies at all levels of government. As with the other forces, political–legal factors sometimes affect dif- ferent firms in the same industry in different ways.

Politically Motivated Events

The terrorist attacks of September 11, 2001, were followed by a number of political decisions on the part of the United States that created both crises and opportunities. Following the sharp decline in air travel in the United States, airlines on the verge of bankruptcy campaigned for and received $15 billion in government

Landscape Survey

The External Landscape

Political–Legal Forces

Economic Forces

Social Forces Technological

Forces

Include the outcomes of government leader decisions, legislation, and judicial court decisions, as well as the decisions rendered by various commissions and agencies at every level of government.

Include growth or decline in gross domestic product and increases or decreases in economic indicators such as inflation, interest rates, and exchange rates that can be problematic for many industries.

Include such factors as societal values, trends, traditions, and religious practices. Potential crises emanating from social forces can lead to a loss of trust and anger toward corporations.

Include scientific improvements and innovations that create opportunities or threats for businesses. These forces can decimate existing businesses and even entire industries.

Figure 3.1 Crises and the External Landscape

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Chapter 3. Sources of Organizational Crises 55

support in 2002 and an additional $2.9 billion in 2003 (Sevastopulo, 2003). The subsequent war in Iraq created a number of crises for organizations, especially those with tight global ties. For example, during the early part of the military conflict, when Allied forces were marching toward Baghdad, many firms modified their advertising campaigns, fearing that their television promotions might be considered insensitive if aired alongside breaking coverage of the war. This move was intended to avoid a potential public relations crisis. At the same time, other firms viewed the war as an opportunity for revenue growth and began planning for Iraq’s future needs in the areas of cell phones, refrigerators, and automobiles. After Saddam Hussein’s regime was ousted in mid-2003, American firms began to compete vigor- ously for lucrative reconstruction contracts. Overall, the war created crises for some firms but opportunities for others (Cummins, 2003; King, 2003; Trachtenberg & Steinberg, 2003).

Laws and Regulations

Most societies have laws and regulations that affect business operations. Table 3.1 summarizes some of the major legislation in the United States over the past century. Although the details surrounding major legislation are always complicated, most of these laws can be viewed as responses to an industry or organizational crisis that already existed (Hartley, 1993). For example, the passage of the Foreign Corrupt Practices Act was in response to the infamous Lockheed bribery case. In this inci- dent, Lockheed paid $12.5 million in bribes and other commissions to secure a sale of $430 million in commercial aircraft to All-Nippon Airways in Japan (Carroll & Buchholtz, 2003). At the time, the president of Lockheed argued that paying bribes was an accepted way of doing business in Japan.

Table 3.1 Examples of U.S. Legislation and the Crises That Led to Its Enactment

Legislation Purpose Crises That Led to Its Enactment

Title VII of the Civil Rights Acts (1964)

Prohibits discrimination against protected employment groups based on factors such as age, religion, race, and gender

Numerous cases involving discrimination against specific groups

Occupational Safety and Health Act (1970)

Requires employers to provide a hazard-free working environment

A response to a number of workplace safety issues that had occurred in the previous decades

Federal Mine Safety and Health Act (1977)

Seeks to ensure a safe working environment for miners

Accidents emanating from the hazardous working environment that miners face

(Continued)

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56 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

Legislation Purpose Crises That Led to Its Enactment

Foreign Corrupt Practices Act (1978)

Outlaws direct payoffs and bribes of foreign governments or business officials

A response to the early 1970s Lockheed bribery incident, in which the company paid bribes to secure contracts to sell aircraft to All-Nippon Airways, a Japanese airline

Oil Pollution Act (1990)

Mandates that oil storage facilities and vessels provide a detailed plan of how they will respond to a large oil spill

A response to the 1989 Exxon Valdez oil spill in Prince William Sound, off the coast of Alaska

Aviation and Transportation Security Act (2001)

Created the Transportation Security Administration to help ensure the safety of the nation’s air travel system

A response to the terrorist attacks on the World Trade Center in New York on September 11, 2001

Sarbanes-Oxley Act (2002)

Makes businesses more accountable by requiring them to adhere to higher standards of financial disclosure

A response to a number of corporate scandals involving inappropriate bookkeeping, including the most famous one, the Enron Corporation

CAN SPAM Act (2003)

The Controlling the Assault of Non-Solicited Pornography and Marketing Act prescribes regulations for e-mail spammers

A response to the proliferation of unwanted e-mail that has glutted cyberspace

Food Allergen Labeling and Consumer Protection Act of 2004 (FALCPA)

Requires the labeling of known allergens on food labels

Various cases concerning illness or death from ingesting a food substance

Patient Protection and Affordable Care Act (2010)

Increases regulation of health care providers and insurance companies in an effort to lower costs and expand coverage

Some organizations offered health insurance to their employees but others did not

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Outlines comprehensive regulation of U.S. financial markets and credit rating agencies

The mortgage/financial crisis of 2008

Table 3.1 Continued

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Chapter 3. Sources of Organizational Crises 57

Organizations are often affected by legislation and other political events specific to their lines of business. For example, changing legislation that concerns food safety and health can lead to organizational crises. Consider the appearance of variant Creuztfeldt-Jakob disease (vCJD), better known as Mad Cow Disease. This ailment is a rare malady of the brain passed through tainted meat. When it began to surface in the United Kingdom in 1996, most European nations responded by ban- ning the import of British beef. Firms in the industry were not able to ensure safety, and financial losses were staggering (Higgins, 2001). Although measures were implemented to stop the spread of the disease, collateral damage affected other stakeholders in the beef and food-related industries. For example, the economic impact in Canada was around $10 billion in lost trade and compensation, despite the fact that very little is known about the disease (Fortier, 2008). As an example, a single diseased cow in northern Alberta in 2003 led to a widespread closing of the borders, with thousands of cattle slaughtered and sales of Canadian beef falling to crisis levels, from $1.10 per pound to 30 cents (Fortier, 2008). While the disease itself can be considered a crisis, the reaction to it created a secondary crisis.

Economic Forces

Economic forces can also be a source of organizational crises. Growth or decline in gross domestic product (GDP) and shifts in economic indicators such as infla- tion, interest rates, and exchange rates can be problematic for many companies. Other factors such as an overexpansion of credit and surges in energy prices and health care costs can also create challenges for firms in many industries.

The Overexpansion of Credit

An overexpansion of credit, particularly in the subprime mortgage industry, created an economic crisis in the United States that had a ripple effect around the world. Extending credit can have its advantages when the debt is paid back in a timely manner. However, when excessive debt causes normal spending to decrease, the economy slows. To offset this problem, central banks like the Federal Reserve often extend additional credit, initiating a continuous cycle of debt, spending, and more debt. Hence, expanding credit can create what appears to be economic growth in the short term, but it can also create a “bubble” and economic stagnation in the long term (Kline, 2010). In other words, once that “demand” is actually consumed, a void awaits at the end of the tunnel—an economic slowdown, or worse, a reces- sion. When a recession results, a crisis is created for many organizations because spending decreases and budget cuts typically follow. Sometimes these cutbacks occur in vulnerable areas, such as safety and equipment overhaul. When safety is compromised or equipment is not repaired or replaced in a timely manner, acci- dents will be the result.

On a personal level, much can be gleaned from observing the link between con- sumerism and credit. When consumers do not have what they want, they attempt to buy it. However, if they do not have the means to pay, they seek credit. Consumers

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with poor or marginal credit histories represent substantial payback risks, especially if the economy declines. Backed by Federal Reserve policies, these consumers were granted mortgages for relatively expensive homes, often with escalating interest rates, balloon payments, and other characteristics that sparked the financial crisis.

An interesting side note on the credit discussion is the role of the positive think- ing industry and its relation to the economic crisis. The positive thinking industry is comprised of motivational speakers, self-help books, and an endless array of CDs and DVDs that compel individuals to view themselves and their abilities with more confidence. This increased sense of self may have contributed to an increased desire for material goods, amplifying a cycle of consumerism that is not based on adequate financial resources. Instead, individuals spend today and hope to pay later. Ehrenreich (2009) surmised that this type of irrational exuberance might have contributed to the crisis.

Hence, the positive thinking movement offers some insight on the consumer end of the mortgage problem that occurred during the recession. Many consumers believed they were “entitled” to own homes beyond their economic means. The Federal Reserve, government policy promoting home ownership, and entities like Fannie Mae and Freddie Mac flooded the market with excessive funds at artificially low interest rates. Likewise, the mortgage companies that promoted these loans were overly optimistic as well. The result was not only a crisis for the mortgage companies and the recipients of their loans, but a worldwide recession that jolted service and manufacturing industries alike.

The Surge in Oil Prices

Although many shifts in economic forces can create crises that permeate an industry, some firms may be better situated to withstand them than others. When oil prices spiked in 2005, for example, firms in oil-intensive industries such as airlines and carmakers began to experience severe cost pressures (Michaels & Trottman, 2005). These hikes in fuel prices did not have the same effect on all airlines, although specific effects are difficult to determine because of other, simul- taneous environmental and competitive changes in the industry. Weak players like Delta seemed to have been hit the hardest, while budget carriers like Southwest and Ryanair experienced mild gains. This advantage occurred because fuel represents a lower percentage of operating costs on short-haul flights such as those championed by budget carriers, and these increases can be spread over more customers when occupancy rates are higher (Michaels & Trottman, 2005).

Fuel economy standards can require that producers develop new vehicles or modify existing ones so that average fuel economy goals are met. This can be a costly venture. When the George W. Bush administration proposed that the small- est trucks reach 28.4 miles per gallon and the largest trucks reach 21.4 miles per gallon by 2011, it estimated that the industry would spend $6.3 billion over four years to comply, adding $275 to the price tag of a large truck by 2011 (Meckler & Lundegaard, 2005). When President Barack Obama announced an additional increase in the corporate average fuel economy (CAFE) standards to 55 miles per gallon by 2025, some analysts estimated that production costs would rise by as

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much as an additional $3,000 per vehicle (Tennant, 2011). Although proponents of the higher standards argued that fuel savings would more than compensate for the additional costs if the target can be achieved, the new regulation, a political–legal force, influenced an economic force and had the potential to create a crisis for automobile manufacturers.

When oil prices spiked in 2008, however, firms in the automobile industry faced a different kind of crisis, one sparked by an economic factor. Expectations that gasoline prices would remain high over the long term affect demand for automo- biles, as consumers shifted from sport utility vehicles (SUVs), large cars, and trucks to smaller, more fuel-efficient alternatives, as well as hybrids and electric vehicles (EVs). Hence, the cost of complying with the regulations was no longer a consid- eration because producers were required to alter both their research and develop- ment and their production priorities to address these new demand patterns. Ford and General Motors (GM) acknowledged this reality early in 2008, while start-up firms around the world began the race to develop vehicles that consume less fuel or eschew gasoline altogether (Stewart, 2008; Taylor, 2008). As a result, what began as a potential crisis with political–legal origins was transformed into a more substantial crisis with an economic impetus.

The downturn in the economy and the unpredictability of oil prices contrib- uted to ongoing problems for the industry as well. Indeed, automobile sales dipped during the economic downturn of 2009 but recovered in 2010, prompted by gains in more fuel-efficient vehicles. The rise in gasoline prices has created long-term challenges for manufacturers that rely on trucks, large vehicles, and SUVs. Small cars accounted for about one-third of new vehicle sales globally in the early 2010s, but forecasting fuel prices is very difficult, especially in the short term. The trend reversed temporarily in the 2010 when average fuel prices in the United States consistently remained below $4 per gallon, as sales of SUVs and pickup trucks increased or exceeded car sales at many automakers. When $4 gasoline returned in early 2012, however, consumer demand shifted back to automobiles boasting 30 or more miles per gallon, as well as updated SUVs engineered for better fuel economy.

Unfortunately, the automobile industry crisis spilled over into other related industries as well. U.S. automobile parts suppliers were forced to realign their work- forces and production schedules to meet the overall decline and the shift toward more fuel-efficient vehicles. In addition, suppliers typically must absorb lower mar- gins when their customers experience a downturn in sales (Bennett, 2008).

Social Forces

Social forces can trigger a variety of crises and include such factors as societal values, trends, traditions, and religious practices. Societal values are beliefs that citizens tend to hold in high esteem. In the United States, major values include individual freedom, fairness, concern for the environment, diversity, consumer rights, and equality of opportunity. Potential crises emanating from social forces can lead to a loss of trust and anger toward corporations, and to various forms of

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social disapproval including boycotts, negative websites, and bad publicity. When these negative feelings are expressed through social media, the word can spread in a matter of hours.

Distrust of Corporate America

One social force of keen interest is the anti-corporate sentiment shared by many consumers. Although the reasons for this phenomenon are beyond the scope of this book, evidence can be found in the “Occupy Wall Street” movement launched in 2011. Distrust is manifested when ordinary people believe unfounded rumors. One of the more fascinating instances in consumer history revolved around Procter & Gamble in the early 1980s. The rumor concerned the widespread belief that its cor- porate logo was a satanic symbol and its chief executive officer (CEO) was a devil worshiper, a claim the CEO allegedly made on the Merv Griffin television program (Cato, 1982). What followed was the distribution of literature urging consumers to boycott Procter & Gamble. Although there was no truth to the rumor, the company expended legal resources in efforts to stop those who were spreading the literature, mostly in the form of photocopied flyers. In the early 1990s, another such rumor surfaced, this time claiming that the popular Cabbage Patch Dolls were possessed by the devil (Steele, Smith, & McBroom, 1999).

Unfortunately, corporate America does not always live up to society’s ethical standards. The coal mining industry is famous for ongoing management–labor strife. The safety record for coal mining is abysmal, despite the fact that a reduction of fatalities has occurred over the past century. However, 2010 was one of the worst years on record. In one notable case, an April 5 methane explosion at a Massey Energy coal mine near Beckley, West Virginia, killed 29 miners. An independent investigation found the explosion to be completely preventable had Massey Energy followed basic safety standards of the mining industry (“WV governor’s report,” 2011).

Distrust of Massey Energy is not a recent occurrence. In fact, the company has been widely cited as having a culture of disregard of worker safety (Barrett, 2011; Ceniceros, 2011). From 2005 to May 2010, the Mine Safety and Health Administration (MSHA) issued 1,342 safety violations totaling $1.89 million in fines. Rather than address the safety violations, Massey chose to contest these citations in court by challenging the regulations (Smith, 2010). Massey’s former CEO, Don Blankenship, has come under much criticism for his role in promot- ing production at the expense of worker safety. A Rolling Stone feature article on Blankenship labeled him “The Dark Lord of Coal Country” (Goodell, 2010).

Preoccupation With “the Bargain”

The distrust of corporate America also extends to other industries like discount retail, where a heavy premium is placed on low prices. Some Americans believe workers in this industry are underpaid and treated unfairly (Ehrenreich, 2001). Indeed, in order to sell goods at low prices, the big box retailers must control costs. Keeping labor costs low is a necessity, and benefits such as health care can be expen- sive (Shell, 2010).

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The preoccupation with the bargain extends into quality as well. Consumer pressures can prompt retailers to sacrifice quality. Many appliances and electron- ics are built at rock-bottom costs, and consumers often discard them after a short period of time and purchase a replacement. This preference for low price over high quality can be viewed as a crisis of sorts. Craftsmanship and quality were valued as far back as the founding of the United States, and citizens were willing to pay a higher price for higher-quality goods (Crawford, 2009).

To recap, the societal emphasis on bargains has contributed to a loss of dignity of rank-and-file workers in retail establishments as well as a decline in quality of fin- ished goods. But another crisis has also been initiated: the movement of manufac- turing jobs overseas. While “corporate greed” is often blamed for the displacement of jobs, consumer preferences for low prices ultimately drive corporate behavior (Fishman, 2006; Shell, 2010). Large firms like Wal-Mart that provide low prices are often blamed for the problem as well. Wal-Mart’s depression of wages by buying products made by low-wage earners in developing nations has had a major impact on the U.S. manufacturing sector, has reduced the standard of living of many peo- ple, and has removed a major source of jobs (manufacturing) from the American business environment. This has created a crisis in that the alternative employment for displaced workers has not grown as fast as the outsourcing has developed. Low- paying jobs create a negative multiplier effect that depresses the entire economy. This is a major crisis for unskilled or lower-skilled workers.

Social Equality

One of the more visible social trends in the United States is the movement away from racial discrimination, including efforts by companies to provide equal access to all customers, regardless of race. The Denny’s restaurant discrimination case is an example of how an incident of racism on the part of a large company can result in a strong public backlash. The incident began in 1993 when a waitress at an Annapolis, Maryland, restaurant purportedly refused to serve six African American Secret Service agents (Chin et al., 1993). The result was a major media frenzy that eventually became a key story on the CBS Evening News. As a result of the crisis, Denny’s changed many of its human resource practices.

The appearance of racism, even if not intended, can result in serious public scrutiny. Cracker Barrel, the family-oriented restaurant chain based in Lebanon, Tennessee, found itself in a crisis when Rose Rock, mother of comedian Chris Rock, visited the Murrells Inlet Cracker Barrel (near Myrtle Beach, South Carolina) on May 16, 2006. Ms. Rock and her daughter waited for 30 minutes without service while white customers were served (Fuller, 2006). The incident eventually led to a news conference, held in the parking lot of the restaurant, which included Al Sharpton and officials from the restaurant’s headquarters. The official statement made by Cracker Barrel was that the incident was a service issue, not a racial issue. Apparently, Rock and her daughter had been seated but not assigned a server (Fuller, 2006).

But social equality does not necessarily include those workers who produce textiles, appliances, and other goods in other countries. Americans are quick to criticize firms that appear to facilitate so-called sweatshops, and many are willing to boycott certain companies to address their concerns.

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The Health and Fitness Trend

Social forces can result in an opportunity for companies in one industry while simultaneously creating crises in another industry. For example, the health and fitness trend that emerged in the 1990s has spawned growth in a number of indus- tries including health and fitness centers, sport drinks, nutritional supplements, and low-fat foods. The reality television show The Biggest Loser encourages people to lose weight and stay fit. The popular series was launched in October 2004 and has received high ratings and a loyal fan base (Siegler, 2010). However, this same trend for health and fitness has hurt a number of businesses in less health-friendly industries such as tobacco, alcohol, and fast-food restaurants. The fast-food indus- try, and particularly McDonald’s, has been the target of much criticism concerning the health qualities of their menu offerings (Copeland, 2005). High-fat content and large servings are common in this industry.

Sometimes social factors appear to conflict with each other. During the past several years, many fast-food restaurants have been “supersizing” their meal com- binations by adding extra fries and larger drinks, while at the same time expand- ing alternatives for items such as grilled chicken sandwiches and salads (Ellison & Steinberg, 2003). In 2004, Coca-Cola and PepsiCo began to emphasize smaller cans and bottles (McKay, 2004), while McDonald’s introduced low-carb menu items (Leung, 2004). Sometimes a company will appear to buck the social trend and offer products that seem counter to society’s higher-road wishes. With the introduction and reported success of products like Hardee’s Monster Thickburger, with 107 fat grams and 1,418 calories, the extent to which many American consumers consider health factors when purchasing fast food is not always clear (Gray, 2005). In this instance, what one firm considers to be a potential crisis might be seen as a business opportunity by another.

Recent criticism of the McDonald’s Happy Meals illustrates conflicts that can exist between consumers and interest groups. In late 2010, the San Francisco board of supervisors voted to disallow restaurants like McDonald’s from including toys as part of a meal unless the accompanying food complied with prescribed limits on calories, sugar, sodium, and fat content. Although this measure was ostensibly aimed at curbing childhood obesity, it clearly targeted McDonald’s Happy Meals. Shortly after the vote, the advocacy group Center for Science in the Public Interest filed a lawsuit accusing McDonald’s of deceptive advertising practices to attract children to their restaurants. The center alleged that Happy Meals contain amounts of fat, sodium, and calories much higher than government-recommended levels. Responding to the attacks, CEO Jim Skinner attacked what he called the “food police,” charging the legislation prohibits families from making their own decisions about menu items (Farrell, 2010; Farrell & Weitzman, 2010).

The beer industry has been in a public relations crisis of sorts for several decades:it is continually hounded by charges of contributing to poor health, alco- holism, and drunk driving. Recognizing the controversial nature of the industry, many beer companies now promote responsible drinking in their advertise- ments. Some have even advocated the health benefits of beer. In the mid-2000s, Anheuser-Busch teamed up with noted Harvard epidemiologist Meir Stampfer to tout the potential medical benefits of beer consumption. Stampfer cites a number

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of studies suggesting that moderate consumption of alcohol may reduce the risk of heart attack, diabetes, and other ailments (Hellier & Ellison, 2005).

Concern for the Environment and Sustainable Development

A major social force, particularly in the United States and the European Union, is the heightened concern for the environment and the need to practice sustainable development, specifically “development that meets the need of the present world without compromising the ability of future generations to meet their own needs” (Brundtland Commission, 1987, p. 54). Hence, the pursuit of sustainability has both short- and long-term implications. Of course, sustainability efforts can involve an investment of resources, an opportunity cost dilemma that balances profits with funds to protect and sustain resources. Nonetheless, consumers expect firms to engage in sustainable practice; those that do not risk a public relations crisis.

Stakeholders do not always agree on appropriate actions with regard to sustain- ability. A prominent ecological concern for many industries—particularly those involved in heavy manufacturing—is the ongoing debate over anthropogenic (human-induced) climate change. Proponents contend that carbon dioxide produced by human activity is the impetus for substantial changes in global climate patterns. If unchecked, these changes will influence life on Earth in dramatic ways. Critics of the anthropogenic climate change hypothesis question the causal link between car- bon dioxide in the atmosphere and global temperatures. While the two appear to be positively correlated—to the extent that average global temperatures can be measured and computed accurately—shifts in temperature appear to precede changes in carbon dioxide levels, not the other way around. Although this debate is complex and beyond the scope of this text, governments frequently attempt to manage economic develop- ment or address ecological concerns. For example, various plans have been proposed to tax carbon emissions, require firms to buy and sell carbon permits in order to engage in production, or restrict certain manufacturing activity altogether. While the ecological impact of such measures is open to debate, the economic ramifications of such measures would be significant, especially in manufacturing industries.

Technological Forces

Technological forces include scientific improvements and innovations that cre- ate both opportunities and threats for businesses. The rate of technological change varies considerably from one industry to another and can affect a firm’s operations as well as its products and services. Firms have used advances in technology such as computers, satellites, and fiber optics to perform their traditional tasks at lower costs and higher levels of customer satisfaction.

New Technology Pitfalls

Technological forces not only create opportunities for firms, but they can also be a source of crises. These forces can decimate existing businesses and even entire industries by shifting demand from one product to another. Examples of

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such changes include the shifts from vacuum tubes to transistors, from steam locomotives to diesel and electric engines, from fountain pens to ballpoints, from propeller airplanes to jets, and from typewriters to computers (Wright, Kroll, & Parnell, 1998).

Technological change can create its own opposition, such as has occurred with the production of batteries for electric vehicles. Although considerable progress has been made, producers of such vehicles have not been free of crises. For example, as mentioned in Chapter 1, General Motors (GM) encountered a crisis in 2011 when crash testing by the National Highway Traffic Safety Administration (NHTSA) revealed that the battery utilized in the Chevy Volt could cause fires. In response, GM made loaner cars available to the 6,000 owners of Volt owners while the prob- lem was resolved (Terlep, 2011). Indeed, the effects of the information technology (IT) revolution have not always been positive. Information theft though hacking, pirating, and unauthorized entry into company information systems has created huge problems and crises for companies and organizations across the economy. The trust and credibility of everyone is now questioned in almost any organization and in any industry.

Resistance to Technology

History is replete with examples of those who have shunned technology. For some, technology itself was the crisis. The Luddites, for example, carried out vio- lent attacks on technology in the early 1800s by smashing machines in industrial settings. However, the attacks, which originated in England during the Industrial Revolution, were more of a social protest against falling wages, unemployment, and rising food prices (Malcolm, 1970; Wren, 1987). In such an environment, the threat that machines would displace jobs seemed realistic. Unfortunately for the Luddites, their actions went too far, even to the point of burning down the houses of machine inventors John Kay and James Hargreaves (Wren, 1987).

An American group that even today shuns most technology, particularly electricity, is the Amish. Their rationale is that traditional Amish culture and social customs may be diluted (Berry, 1977). It can be argued that the Amish represent “the truest geniuses of technology, for they understand the necessity of limiting it, and they know how to limit it” (p. 212). It is not that the Amish oppose technology per se, but rather, they argue that it must be used only when it promotes the goodness of the people and the community (Rheingold, 1999; Schultze, 2002). The Amish, then, have reasoned that technological advances carry negative consequences as well and must be carefully evaluated when adopting a lifestyle.

From a crisis management perspective, the implications of such suspicions of technology are noteworthy. Although not to the degree of the Luddites and the Amish, many people today still fear technology and the change it can bring about. They work in our organizations, and their resistance can spawn a crisis. Consider these common examples (all of which have been encountered by the authors of this book) seen in various forms throughout a number of organizations today:

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■ A supervisor in a department creates problems for the IT department when new software is introduced to replace the existing one. The result is poor morale in the resisting department and a headache of implementation for the IT department. The situation reaches a crisis when the department supervisor and the IT manager get in a shouting match in the company cafeteria.

■ A group of teachers in a public school district refuse to access their e-mail accounts from their school-issued computers placed in the classrooms. This older group of teachers lacks technical savvy and still feels that “the old ways are the best ways,” a veiled reference to their resistance to learning how to use personal comput- ers. As a result, the school district sends e-mails to all teachers and print hard copies for those who resist the change. Two minicrises are present in this situation. First, the printing of hard copies and the subsequent unnecessary use of paper is a need- less waste of resources. Second, the very group of people responsible for teaching our children and inspiring a love of learning are resistant to learning new things themselves.

■ A senior accounting instructor in a small four-year college refuses to use spreadsheets as part of his instruction. The reason he gives is that “accounting is at the tip of the pencil,” an obvious reference to the thinking skills required of every accountant. The real reason, however, is that this instructor does not know how to use computer spreadsheets, despite the fact that their usage has become main- stream in the field. This instructor had been resisting technology for years, and when he announces his retirement, the department finally advances into the 21st century in the delivery of its accounting instruction.

■ A supply chain manager who has kept up to date in the field is resisted by the company finance director when he proposes changes in how the company can place orders with its suppliers. The changes involve upgrading to electronic inter- facing, already a common practice in many organizations. Each time the proposals are made, the finance director blatantly states that it costs too much. Again, two cri- ses are present. First, the company misses out on a chance to make a much-needed upgrade to its purchasing function. Second, the supply chain manager seriously considers leaving his present employer for work in a more progressive organization.

Resistance to changes in technology remains prevalent. In the examples given, the overlap between strategic challenges and crisis events is evident. What begins as a strategic challenge ends up as a mild to moderate crisis because of some form of resistance to technology.

The advent of the Internet has created both opportunities and potential cri- ses for government agencies. On the one hand, local governments can utilize the Internet to collect fees, disseminate information, and even provide some limited services to citizens. These types of arrangements emanate from strategic planning that seeks to serve a wider number of citizens in the most efficient and cost effective means possible. On the other hand, governments are charged with securing large amounts of data and protecting it from thieves. Indeed, the Internet has opened a new arena of organizational crises created by hackers, disgruntled consumers and employees, and others. Criminals throughout the world can extort thousands of

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dollars from organizations fearful of a Web crash. So-called cyber-blackmailers may have the ability to disrupt or even halt Internet activity associated with certain sites (Bryan-Low, 2005).

Crises and the Industry Life Cycle

Industries develop and evolve over time. Competitors within an industry change continually, and as a result, the nature and structure of the industry can also change as it matures and its markets are redefined. Strategy scholars have long known that an industry’s developmental stage influences the nature of competition and poten- tial profitability among competitors (Hofer, 1975; Miles, Snow, & Sharfman, 1993). Likewise, the stage of the industry life cycle can serve as a breeding ground for cer- tain type of crises. In theory, each industry passes through five distinct phases of an industry life cycle: introduction, growth, shakeout, maturity, and decline.

Introduction Stage

In a young industry, demand for the industry’s outputs is low while product and/or service awareness is still developing. Most purchasers are first-time buy- ers and tend to be relatively affluent, risk tolerant, and innovative (Parnell, 2013). Process technology is a key concern because firms are seeking ways to improve their production and distribution efficiencies. Product technology is also important because of the need to introduce new and innovative products. Crisis situations can develop with a new firm whose viability is linked to a developing technology or innovative product design that may be particularly vulnerable to imitation and even copyright infringement.

The untested domain of a new industry can also create a potential crisis, as we can see in the realm of transportation. As commercial air travel grew during the 1940s and 1950s, a string of aviation accidents also occurred. The causes of these accidents included pilot error, weather conditions, and flaws in the design of the aircraft. Two aircraft in particular that had their share of fatal crashes during these early years were the British-made de Havilland Comet and U.S.-built Lockheed Electra. Both of these suffered from structural defects in their earlier models. The de Havilland Comet was the world’s first commercial jet, beginning service in 1952. Unfortunately, a string of fatal crashes revealed a structural flaw in the aircraft that eventually led to major changes in its design (Winchester, 2010). Likewise, the Lockheed Electra was one of the first commercial turboprop aircraft. It also had two major crashes involving a loss of a wing during the 1950s. Lockheed spent $25 million to modify and strengthen the design of the plane, which later went on to have a successful tenure in commercial aviation history (Magnuson, 1985). As for the de Havilland Comet, it also enjoyed success. However, unlike the Electra, which had existing aircraft retrofitted with safety and structural improvements, the Comet was improved by building later versions from the first-generation aircraft.

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Growth Stage

The second industry stage, growth, is characterized by rising customer demand. Technological issues are addressed so that higher production can take place. The industry grows rapidly until market demand approaches saturation. Fewer first- time buyers remain, and most purchases tend to be upgrades or replacements. Many competitors are profitable, but they may be cash poor since available funds are heavily invested in new facilities or technologies (Parnell, 2013).

Some industries have been around for decades but are currently enjoying a new wave of growth. One example is the cruise ship industry, which is entering a surge of growth as baby boomers and their families seek out vacation retreats. At present, existing ships are being renovated and newer, larger vessels are joining the fleets of many of the cruise lines. But with more people hitting the seas, there is also a greater potential for accidents and crises. There have been several high-profile cruise ship fires in recent years, most notably the 2006 Carnival Cruise incident involving the Star Princess, a ship carrying 3,813 passengers and crew when it caught fire while bound for Jamaica. Two people suffered significant smoke inhalation, and one per- son died of a heart attack (Hayhurst, 2006).

In 2009, Princess Cruises experienced a fire in the engine room on its MS Royal Princess, a small ship that was cruising off Port Said, Egypt. Fortunately there were no fatalities, but the ship had to cancel its remaining cruise time as it was assisted back to port. In this fire, a special carbon dioxide flooding system was used to extinguish the blaze. Ship firefighting is different in that every gal- lon of water used to fight a fire must be pumped off the ship lest the vessel sink. Using carbon dioxide has been successful with smaller fires in confined spaces, a situation that exists on ships (Rielage, 2010). Although cruise ship fires are rare, it is an industry-wide threat because there is a fire potential on any cruise vessel (Coombs, 2007).

Another incident common to the entire industry is that of missing passengers who apparently fall overboard. In 2004 and 2005, for example, a total of 13 pas- sengers disappeared from cruise ships (Martinez, 2005). Inevitably, such events can result in wrongful death lawsuits. Royal Caribbean faced this crisis in December 2005 when passenger George Smith disappeared on his honeymoon while in the Mediterranean. His parents filed a wrongful death lawsuit, claiming Royal Caribbean, the world’s second largest cruise ship company, did not take sufficient action to prevent his disappearance (Martinez, 2005).

Although rare, a cruise ship accident can constitute a major crisis. A high-profile accident occurred on January 13, 2012, when the cruise ship Costa Concordia hit a rock close to shore off Giglio Island, Italy. The accident caused the ship to take on water and become partially submerged. Eleven of the ship’s 4,200 passengers were confirmed dead and another 24 were missing (Mouawad, 2012). The Costa Concordia is owned by Costa Cruises, a part of Carnival Corporation, the world’s largest cruise line. The accident occurred when the ship deviated from its normal course and sailed close to the shore. The reason for the change in course was widely disputed, but the captain of the ship, Francesco Schettino, claimed that he was ordered to do so by company officials (Pianigiani, 2012).

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Shakeout Stage

As growth slows, the industry may enter a shakeout stage. At this point, indus- try growth is no longer strong enough to support the increasing number of rivals. Competitive crises become common, as firms take advantage of economies of scale. As a result, some of the industry’s weaker competitors may not survive (Parnell, 2013).

A shakeout of a particular business may occur if a marginally performing firm encounters a crisis. Such was the case with the Mexican restaurant chain Chi-Chi’s when it was struck with an outbreak of hepatitis A in September 2003. The sudden crisis sickened more than 660 people and caused three deaths. To make matters worse, the chain was already in Chapter 11 bankruptcy when the illnesses hit (Veil, Liu, Erickson, & Sellnow, 2005). Unfortunately, the impact of the crisis was enough to put the company out of business permanently.

Maturity Stage

Industry maturity occurs when the market demand for the industry’s outputs is completely saturated. Virtually all purchases are upgrades or replacements, and industry growth may be slow if it is growing at all. Industry standards for quality and service have been established, and customer expectations tend to be more con- sistent than in previous stages (Parnell, 2013). When an industry reaches maturity, its remaining firms tend to be large and are more likely to become targets of interest groups, trade unions, and the like.

Because industry leaders tend to be larger, high-profile companies, they can also be targets for criticism from various stakeholders. A large company may be singled out for questionable practices, while smaller companies in the same industry may go unnoticed. Nestlé was targeted for a massive boycott in the 1970s for marketing infant formula to third world countries. However, smaller companies followed the same marketing strategy but were not attacked. Union Carbide was targeted by the newly created Environmental Protection Agency in 1970 not only for its large size but for the extent of its pollution in the Ohio Valley area in West Virginia. Fast for- ward to today, and one can see industry leaders like Wal-Mart, Starbucks, PepsiCo, and Coca-Cola under the gun for various alleged misdeeds.

Decline Stage

Sales decrease if and when an industry approaches the final stage, decline. This trend often begins when consumers turn to more convenient, safer, or higher- quality offerings from firms in substitute industries. Some firms may divest their business units in this stage, whereas others may seek to “reinvent themselves” and pursue a new wave of growth associated with a similar product or service (Parnell, 2013). As companies in these industries become weaker, they may also become more prone to crises.

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The tobacco industry is one that has seen its share of crises, including product sales declines in the United States (although not in all parts of the world), as well as aggressive antismoking campaigns and lawsuits. Certainly, this is an industry in decline, at least in the United States. However, another less obvious example is the regional shopping mall industry. Early instances of indoor mall closings began in larger cities such as Chicago, Dallas, Los Angeles, San Francisco, and Milwaukee (Kilborn, 2003). Replacing regional mall shopping is the push for one-stop shop- ping at supercenters and power center retailers that offer one-stop shopping for food and other items (Ryan, 2008). Prices at these outlets are often lower because of correspondingly lower overhead costs.

Although retail sites have always been prone to some threat of robbery, some shopping malls have attracted a criminal element. Consider the once-famous Mall of Memphis in Tennessee. The two-level mall featured a larger than average food court, a five-screen movie theater, an indoor ice skating rink, and a safe atmosphere. However, the mall became a target for robberies and violent crime in the late 1990s and early 2000s. In one high-profile example, a 71-year-old shop manager was shot in the parking lot during a robbery (Kilborn, 2003). As crime engulfed the mall and the surrounding neighborhood, anchor stores Dillard’s and J.C. Penney departed, triggering an exodus of smaller retailers. The Mall of Memphis closed in December 2003 after 22 years of operation. The facility was a victim of crime, declining neigh- borhoods, and changing customer shopping habits (Maki, 2006). This mall, along with hundreds of others, closed down after many years of successful service. The last years of many of these malls were full of crises, sometimes culminating in seri- ous security and crime problems.

Crises and the Organizational Life Cycle

While the sources of crisis events can be linked to common factors in a given indus- try; many others are a function of an organization’s unique attributes and business processes. Organization-specific factors may be linked to a firm’s stage in the orga- nizational life cycle, the most common description of which is a five-stage model based on the work of several researchers (Lester & Parnell, 2006; Lester, Parnell, & Carraher, 2003; Miller & Friesen, 1984). The following discussion looks at the relationship of the life cycle as a source of different crisis events.

Stage 1: Existence

Stage 1, also known as the existence or entrepreneurial stage (Quinn & Cameron, 1983), marks the beginning of an organization’s development (Churchill & Lewis, 1983). The focus is on identifying a sufficient number of customers who will desire the firm’s products or services. Decision making and ownership are in the hands of one or only a few individuals.

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Most firms in this stage are small; however, many young organizations are launched with a significant amount of venture capital and may be quite large (Starbuck, 2003). The existence stage is characterized by long hours and diverse responsibilities on the part of employees. Because sufficient resources are not always available to hire staff specialists, employees may have to share responsibili- ties and even perform duties with which they might lack familiarity.

Sources of crises for organizations in the existence stage are often associated with resources and specialization. A new firm may lack the resources to protect itself from acts such as copyright infringement and may not be able to hire the spe- cialists necessary to perform critical functions. Because employees often perform multiple roles, the potential for mental errors and/or physical accidents may also be greater during this stage.

When companies are young, the emphasis on formalized employee safety may be lacking. The inexperience and lack of maturity in making decisions can affect the approach to operating a business. The preoccupation with reaching the top without regard for the entire organization can facilitate vulnerabilities that expose the organization to a variety of crises. As an example, Film Recovery Systems, Inc., experienced a crisis early in its history. The company was formed in late 1979 with the purpose of extracting silver from used film. Two years later, however, an employee died from what was later determined to be acute cyanide poisoning. The medical examiner ruled that the victim died from breathing cyanide fumes at the Film Recovery Systems facility (Sethi & Steidlmeier, 1997). After several court cases, three company officials were sentenced for involuntary manslaughter. Eventually, the firm went bankrupt.

Stage 2: Survival

The survival stage is characterized by firm growth (Adizes, 1979). Formalization of structure (Quinn & Cameron, 1983) and establishing distinctive competencies—special abilities that distinguish a firm from its competitors (Miller & Friesen, 1984)—are sought during this stage. Firms in this stage typically focus on generating sufficient cash flow to survive (Churchill & Lewis, 1983).

The growth of the company is often due to a unique differentiating feature that makes it attractive to consumers. Odwalla, Inc., a 25-year-old company that makes fruit juices, is an example of a firm that was in the growth stage when a major crisis hit. The company had enjoyed success based on marketing its juices as fresh, with as little processing as possible. In October 1996 an E. coli outbreak in its unpasteurized apple juice product contributed to the death of a 16-month-old girl and caused 61 other children to become ill (Lawrence, 1999). Prior to the crisis, Odwalla made its juices without preservatives or any artificial ingredients. In addition, the juices were not pasteurized because the process changed the flavor as well as depleted important vitamins and enzymes. This differentiating factor led to the company’s success and, ultimately, to a major crisis as well. Odwalla survived the crisis, but in the process switched to the flash pasteurization of its juice in order to prevent another E. coli outbreak (Lawrence, 1999).

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Chapter 3. Sources of Organizational Crises 71

Stage 3: Success

Organizations in the success stage have passed the survival test, growing to a point at which top management focuses on planning and strategy and leaves daily operations to middle managers and unit managers. Formalization and bureaucracy are the norm in the success stage, as can be seen through written job descriptions, the adoption of official policies and procedures, standardization of work, a clear division of labor, and hierarchical reporting relationships (Quinn & Cameron, 1983). However they must be vigilent because overconfidence and complacency as a result of their hubis is dangerous and a source of vulnerability. Managers need to keep their eye on the prize yet understand that no one is invincible.

When an organization succeeds, it may become the target of various forms of extortion attempts. Cracker Barrel, the Lebanon, Tennessee-based restaurant chain, was the victim in 2004 of such an attempt. In this plot, a mother and son planted a mouse in a bowl of soup at one of the Virginia stores. The two family members were later convicted of attempted extortion (Lockyer, 2007). Likewise, hamburger chain Wendy’s faced an unusual crisis in March 2005 when a San Jose, California, customer, Ann Ayala, allegedly found a human finger in her chili. Law enforce- ment officials quickly got involved and attempted to identify the fingerprint. The finger was also autopsied and was determined to have been inserted after the chili was cooked. This clue led investigators to suspect product tampering. It was later discovered that Mrs. Ayala and her husband planted the finger in the chili in an attempt to collect monetary damages from the company. Nonetheless, Wendy’s lost millions of dollars in sales in the Northern California market during the ordeal (Coombs, 2006).

Extortion attempts also target successful companies via the Internet. Such online extortionists have made threats against big-name companies, including Microsoft and Google. Although these firms have been able to successfully fight off such attacks, not all companies have been as fortunate. A credit card–processing com- pany, 2Checkout, received an online extortion threat that it promptly rebuffed. It was later hit with a denial-of-service attack that put the company offline for more than a week (Fogarty, 2005).

Stage 4: Renewal

The renewing organization displays a desire to recreate a leaner organization that can respond more quickly and effectively to environmental changes (Miller & Friesen, 1984). In effect, the renewal stage can be viewed as one in which a firm seeks to regain control over how it responds to crisis-creating shifts in its environ- ment. Firms in the renewal stage are trying to recapture a spirit of collaboration and teamwork that fosters innovation and creativity.

In an effort to renew itself, an organization may take radical steps to boost its market share. The sport entertainment genre of professional wrestling is one that has enjoyed success, downturns in popularity, and more recently, a resurgence of interest. In a renewal effort, elaborate stunts have been part of the shows.

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Unfortunately, on May 23, 1999, pro wrestler Owen Hart fell 78 feet to his death in a stunt that went awry (Gegax & Adler, 1999). The resulting lawsuits and bad publicity were setbacks for World Wrestling Entertainment (WWE), the promoters of the event.

Despite the popularity and resurgence of professional wrestling, it has also encountered another crisis, a high death rate of wrestlers under the age of 45. One study found that wrestlers had a death rate seven times higher than the general population and were 12 times more likely to die of heart disease (Applebome, 2010). At the core of the problem is the use of steroids to enhance bodybuilding and the abuse of prescription drugs to treat painful injuries. The unusual circumstances surrounding the death of wrestler Chris Benoit in 2007 raised national attention. Benoit committed suicide by hanging himself after choking his wife and son to death in their Atlanta home. An autopsy report found he had significant levels of steroids and the painkiller hydrocodone in his system (Walton & Williams, 2011). This event and others led to calls for Congress to regulate the industry (Red, 2009).

Stage 5: Decline

Firms may exit the life cycle at any stage by going out of business, but those that progress through the stages and are unable to achieve renewal eventually reach the final stage of the life cycle. The decline stage embodies an internal environment char- acterized by politics and power (Mintzberg, 1984) as organization members become more concerned with personal goals rather than organizational goals. For some organizations, the inability to meet the external demands of a former organizational stage leads them to a period of decline when they experience lack of profit and loss of market share. Control and decision making have a tendency to return to a handful of people as desire for the power and influence of earlier stages erodes the viability of the organization. This is a stage at which the management is unable to sustain the momentum, the competitive edge that is critical to success. Lack of energy or interest causes the company to make too many mistakes, become complacent, and sometimes give up. This is a crucial stage that needs to be evaluated continually.

Sometimes, a single crisis can put an organization out of business permanently. Such was the case with Chalk’s Ocean Airways, a niche-oriented carrier that flew flights from the port of Miami, Florida, to the Bahamas in vintage seaplanes. The company had been going through some rough financial times when, on December 19, 2005, one of its planes crashed, killing all 18 passengers and both pilots. The accident, flight 101 from Miami to Bimini, occurred about a minute after takeoff from the waterway. The right wing separated from the fuselage of the plane, caus- ing it to crash in the shallow waters below. The age of the plane—a Grumman Turbo Mallard (G-73T) manufactured in 1947—and structural cracks in the wing contributed to the accident (National Transportation Safety Board [NTSB], 2007).

The airline was founded by A. B. “Pappy” Chalk in 1917. Its beginnings were humble, operating on Miami’s Flagler Street under a beach umbrella with a desk and a phone number nailed to a nearby utility pole (Stieghorst, 2007). After World War I, when Chalk returned after flying for the military, he renamed the airline

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Chapter 3. Sources of Organizational Crises 73

Chalk’s Flying Service in 1919 to fly tourists and fisherman to the Bahamas. Over the years, a number of different owners operated the airline, including the late tele- vision talk-show host Merv Griffin (Stieghorst, 2007). In 1980, a hotel and casino development company bought the airline. This company sold it to several South Florida investors, who used the operating name Pan Am Air Bridge (NTSB, 2007). James Confalone, owner of the company at the time of the accident, bought the airline in 1999 in bankruptcy court (Goodnough, Wald, & Lehren, 2005).

The airline was headquartered in Watson Island, a small island adjacent to the Port of Miami where the planes would takeoff from the waterway, the same channel where the ships also arrive and depart. At the time of the accident, Chalk’s operated three G-73T aircraft offering six to eight flights daily to the Bahamas. On the day after the accident, Chalk’s operated one more flight, after which it ceased operations (NTSB, 2007). Unlike most airline crashes, the Chalk’s Flight 101 accident proved to be fatal to the company.

Firms in the decline stage function with some sort of disadvantage. Whether it is a struggle against stiff competition, a problem with cash flow, or an internal battle for control of the organization, the resolution of a crisis inevitably determines the survival or failure for the organization. The organizational life cycle is summarized in Figure 3.2.

Landscape Survey

The Internal Landscape

Stage 1: Existence

Stage 4: Renewal

Because employees are often performing multiple roles, the potential for mental errors and/or physical accidents may also be prevalent.

Example: Film Recovery Services

Additional supervision and management is acquired as the founders release their control and empower others to direct specific areas of operations.

Example: Odwalla, Inc.

When an organization becomes successful, it may be the target of various forms of extortion attempts.

Examples: Cracker Barrel, Wendy’s

In an effort to renew itself, an organization may take radical steps to boost its market share.

Example: World Wrestling Entertainment

Stage 2: Survival

Stage 3: Success

Stage 5: Decline

When an organization is in a weakened state, a sudden crisis can be fatal to its existence.

Example: Chalk’s Ocean Airways

Figure 3.2 Crises and the Organizational Life Cycle

Summary

Crisis events can originate from a number of sources external to the organization. These forces can be analyzed by examining the firm’s macroenvironment, includ- ing political–legal, economic, social, and technological forces. Political–legal forces

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74 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

include politically motivated events such as terrorism, the outcomes of elections and legislation, as well as the decisions rendered by various commissions and gov- ernmental agencies. Economic forces include growth or decline in gross domestic product and increase or decrease in economic indicators such as inflation, interest rates, and exchange rates. The overexpansion of credit and the surge of oil prices sparked a number of organizational crises. Social forces include societal values, trends, traditions, and religious practices. Social forces specific to crises include a general distrust of corporate America, the preoccupation of consumers with low prices, social inequality and unrest, the health and fitness trend, and concern for the environment and sustainable development. Technological forces include scientific improvements and innovations that create opportunities or threats for businesses, as well as resulting technological pitfalls and resistance to technology on the part of the public. Each of these forces can create crises for organizations.

Organizational crises can also be examined in terms of the industry life cycle. This life cycle affects many firms that offer similar products or services. With each stage of this cycle—introduction, growth, shakeout, maturity, and decline—certain crisis vulnerabilities are more prominent. Likewise, the organizational life cycle, and its corresponding stages of existence—survival, success, renewal, and decline— can also breed specific types of crises.

Chapter Exercise

The class should form four groups, each representing one of the four factors dis- cussed in the chapter: political–legal, economic, social, and technological. Each group creates a list of crises that originate from its respective factor. Display these

Questions for Discussion

1. Identify political trends in your area (city, county, or state) that have con- tributed to or could contribute to a crisis in a particular industry.

2. How do political and economic events comingle to create a crisis?

3. What crisis events are discussed the most on the blogs and Internet sites that you visit?

4. What examples of resistance to technology have you seen where you work? Have you seen resistance at your school? If so, do you think this resistance constitutes a crisis?

5. Identify the life cycle stage in which your organization functions. What specific crises are associated with this stage of development?

6. How can the stage in the industry life cycle affect crises in individual orga- nizations?

7. What industries are most vulnerable to crises in the near future? Explain.

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Chapter 3. Sources of Organizational Crises 75

lists in the classroom and identify the ones that seem to transcend multiple catego- ries, such as crises that have both political and economic dimensions. Conclude the session by addressing trends in the four categories that could spawn future crises.

Mini-Case: Sony Gets Hacked

The name LulzSec probably does not mean much to the majority of the students reading this book. But to Sony, it represents an Internet crisis that cost them an estimated $173 million (Saporito, 2011). LulzSec is a group of hackers who broke into Sony’s network and shut down its PlayStation Network on April 20, 2011. After Sony thought it had fixed the problem, LulzSec hacked their system again and Sony was unable to resolve the problem. During the months of April and May, the com- pany’s network was invaded a total of 20 times (Greenberg, 2011b).

The damage to the company was devastating. The PlayStation Network was down for about a month, leaving Sony in an embarrassing situation. Kazuo Hirai, a Sony executive who many people believe will be next in line as CEO, made the tra- ditional Japanese bow and expressed his regrets to the public (Greenberg, 2011a). In addition, more than 100 million users’ information had been exposed to hackers (Saporito, 2011). Sony’s stock price dropped 23 percent in the months following the crisis (Greenberg, 2011b), and a class action lawsuit was filed in federal court in Los Angeles, charging that Sony was negligent in allowing the theft of consumer data (Wakabayashi, 2011).

Sony’s chief executive, Howard Stringer, has advocated linking the firm’s hardware products to online revenue options such as the PlayStation Network. Competing in the stand-alone hardware industry is no longer a highly profitable venture, and online venues are seen as way to supplement revenues. Apple follows a similar approach, linking its hardware with its iTunes media software (Wakbayashi, 2011). Unfortunately, what appeared to be an attractive strategic alternative also engendered a crisis.

What makes the Sony case particularly interesting is the motive of the hackers. Most cyber-attackers are motivated by money and have sometimes been given the informal term black-hat hacker. In contrast, a white-hat hacker is one who is hired by a company to see if its network can breached. Their motives are strictly to help the firm improve its cyber-security. In between the white- and black-hat groups one finds the gray-hats. This group preys on an organization’s computer network as a form of protest or entertainment. When gray-hats have strong political messages or agendas, they are termed “hacktivists” (Rashid, 2011). In the case of Sony, the hackers were gray-hats, a group of six individuals calling itself LulzSec. Lulz implies entertainment and comes from the familiar LOL (laugh out loud) acronym. Sec is short for security. When the two are put together, it becomes apparent the hackers saw their work as a form of satire. LulzSec claimed to hack into Sony multiple times to expose the company’s lax security (Saporito, 2011).

Unlike the black-hats, who seek to steal data quietly, gray-hats like LulzSec seek publicity to promote an agenda. In one hacking incident, Aaron Barr, then-CEO of cyber-security firm HB Gary Federal, boasted how his company was about to

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76 CRISIS MANAGEMENT IN THE NEW STRATEGY LANDSCAPE

reveal the identities of several hacktivists from a group known as Anonymous. In retaliation, members of Anonymous hacked in HB Gary’s system and stole e-mail and other sensitive documents (Rashid, 2011).

Mini-Case Discussion Questions

1. Why do you think Sony was targeted for attacks by LulzSec?

2. What other examples of hacking are you aware of?

3. Have you or your employer ever been the target of a hacking attempt? If so, what happened and how did your organization recover?

Mini-Case References

Greenberg, A. (2011a, May 24). Sony goes silent as its hacking spree snowballs. Forbes, 34. Greenberg, A. (2011b, June 20). In Sony’s 20th breach in two months, hackers claim 177,000

email addressed compromised. Forbes, 21. Rashid, F. (2011, August 15). Hackers shift from vandalism to data theft. eWeek, 15–16. Saporito, B. (2011, July 4). Hack attack. Time, 50–55. Wakabayashi, D. (2011, April 28). Sony plan for network takes a blow. Wall Street Journal, p. B5.

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