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When a spontaneous acceleration problem led Toyota to recall eight million cars globally and suspend sales of several models in November 2009 and January 2010, the blue-chip corporation faced a momentous challenge. To make matters worse, in February 2010, Toyota suffered another blow when reports surfaced of faulty brakes on the Prius hybrid. The defects have since battered the company’s reputation, resulting in huge losses and sinking consumer confidence.
There are two schools of conventional marketing wisdom on what companies should do in the event of such crises:
- Some experts argue that companies should spend more money and build brand loyalty before any crisis occurs, providing a buffer to declining profits following a crisis.
- Others argue that a portion of advertising budgets should be set aside in case a crisis does occur.
Boston University School of Management’s Shuba Srinivasan, Associate Professor and Dean’s Research Fellow, Marketing, (with co-authors Olivier Rubel and Prasad Naik), in the paper “Optimal Advertising When Envisioning a Product-Harm Crisis,” addresses how companies and their marketing managers can prepare for a potential product harm crisis. The paper, forthcoming in Marketing Science, demonstrates that there is an optimal course of action for incorporating risk into the allocation of marketing resources.
“Marketing managers are better served by spending less on brand loyalty up front and maintaining a reserve for a post-crisis period.”
Using empirical data from the automobile industry, the authors develop a dynamic model of sales growth that assumes a crisis will occur at random times in the future. Their findings complement theoretical models recommending the best advertising budget decisions that incorporate crisis planning. Using the 2000 Ford Explorer rollover problem as an example, they show that Ford’s baseline sales dropped 65 percent immediately following the crisis, which cost the company $3.5 billion. Advertising spend before the crisis was less effective in maintaining sales afterwards, when profits sank.
“Advertising spending after a crisis is more effective in building brand interest than before a crisis.”
The study’s implications suggest that marketing managers and their companies are better served by spending less on building brand loyalty up front and maintaining a reserve for advertising during a post-crisis period. Further, advertising spending after a crisis is more effective in building brand interest than before a crisis.
Overall, product crises are rare, but when they happen they can be devastating to a firm’s brand equity. Managers are well served by setting money aside from their marketing budgets to be available following a potential product crisis event as insurance against the possible damage to long-term brand equity.
More about the paper “Optimal Advertising When Envisioning a Product-Harm Crisis”
For their recent piece in Stanford Social Innovation Review, “Too Good to Fail,” James Post and Fiona Wilson write about the strange case of ShoreBank Corporation, which was shuttered in 2010 for essentially being, they argue, not enough of a big, bad bank to save.
Post is the John F. Smith, Jr. Professor in Management at Boston University School of Management, recent recipient of the Faculty Pioneer for Lifetime Achievement Award from the Aspen Institute, and a widely cited scholar on management and ethics. He and Wilson write,
“On Aug. 20, 2010, the Illinois Department of Financial & Professional Regulation closed ShoreBank, the nation’s first and leading community bank, and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The closure was not unexpected. Reports of the bank’s problems—and a potential rescue—had been circulating for months. But the closure brought to a bitter end an iconic example of progressive social enterprise.”
Post and Wilson note the leadership of ShoreBank Corporation throughout its 37 years of existence in the field of social enterprise, citing the following:
- ShoreBank’s for-profit bank subsidiary was the largest certified Community Development Financial Institution (CDFI) in the nation.
- It made $4.1 billion in mission investments and financed more than 59,000 units of affordable housing.
- In 2008, ShoreBank had more than $2.4 billion in assets and earned more than $4.2 million in net income.
- The organization’s national and international influence ranged from inspiring a national movement of community development financial institutions, shaping federal community investment legislation, and serving as a role model for dozens of progressive banks in the US, as well as managing social and economic development projects in over 60 countries.
Doomed by Washington’s Toxicity?
So, the authors ask, “Why did ShoreBank fail? What lessons can the social enterprise community learn from its record of success? And what can be learned from its closure?”
They argue that, at base, ShoreBank was doomed, at least in part, because of the “toxic politics of Washington today.” For one, the organization suffered by the very fact that it, unlike many Wall Street giants, was not considered “too big to fail.” “Had it been much larger,” they write, “the federal government might have saved it from collapse. But the federal government was not concerned about smaller banks or banks that were socially beneficial, in other words, “too good to fail.”
Moreover, Republican lawmakers, Post and Wilson write, suspicious of their Democratic counterparts’ interest in saving ShoreBank, lead them to reject a bailout for the organization after the financial meltdown in Chicago and beyond threatened its existence.
Lessons from Beyond Politics
“Beyond this lesson in toxic politics, there are several big-picture lessons to be gleaned from the closing of ShoreBank,” the authors write. Some of these include:
- Balance Social Mission with Financial Realities: “An organization’s social mission must be balanced with financial realities. A social mission should serve as a powerful incentive to strengthen an organization’s operating systems from the harsh consequences of the economy, competition, or a hostile environment.”
- Ensure Resources Match Achievement Goals: “ShoreBank also provides a cautionary lesson about new organizational models and resource limitations. There was genius in the idea of using a bank holding company to own and operate for-profit and nonprofit entities focused on the same social mission….At the same time, legitimate questions remain about whether the resources of the holding company were sufficient for the breadth of its activities.”
Read the full article at Stanford Social Innovation Review.