Averting Disaster

Dec. 21, 2004
Learn to spot early-warning signs.

Industrial accidents, oil spills, labor disputes, product recalls, and similar incidents conjure typical images of a corporate crisis. Bridgestone/Firestone Inc.'s massive tire recall and the litigation surrounding it continue to make headlines. Yet only 23% of business crises are "no-warning" or "sudden" calamities, says the Institute for Crisis Management (ICM) in Louisville, which analyzed business crisis news stories that appeared between 1990 and 1999. The majority of business crises, the Institute found, began as smoldering ones, small and internal problems that someone knew about but did nothing to address. In the ICM analysis, 75% of crises resulted from inappropriate action or inaction by top management. Much of that top management resided in manufacturing firms. Indeed, ICM's analysis shows that four of the five most crisis-prone industries in 1999 were manufacturers in the following industries: medical and surgical items, software, pharmaceuticals, and computers. Early-warning signs of developing crises vary widely. Red flags may include increasing numbers of consumer complaints; a growing number of safety problems or accidents; a rash of lawsuits; troubling rumors; more frequent quality control issues; and labor unrest, including poor morale or tension among employees. "Executives have to look for warning signals and act on them," says Robin Cohn, a New York-based veteran of corporate public relations and author of The PR Crisis Bible (2000, St. Martin's Press). "You stop what you're doing and fix it. Although it may be expensive it certainly will be a lot less costly than a full-blown crisis." When management ignores such early-warning signs, the consequences can be costly in terms of lost customers, lost earnings, and loss of reputation. Top executives must learn how to spot early indicators of trouble to avert, or at least ameliorate, a crisis. In order for companies to start monitoring for early-warning signs, they first must drop the "kill the messenger" mentality, says ICM President Larry L. Smith. If a company has a kill-the-messenger culture, then it already has a smoldering crisis because executives and employees will be afraid to report a problem. Ian Mitroff, founder and former director of the Center for Crisis Management at the University of Southern California, Los Angeles, and president of his own crisis management firm, says corporations should establish a reward system to encourage employees to report early warning signs. Additionally, he says, they need to invest in what he calls "crisis centers." These centers would evaluate information from plants and offices, looking for early indicators of a potential crisis. Mitroff contends that if corporations can collect truckloads of information on production, finances, and marketing, they can become adept at gathering information to prevent a crisis. "When [a company doesn't] put in the infrastructure to handle issues such as crisis management, a company sets its own demise," Mitroff says. "Corporations are ill equipped to handle a crisis. We need to restructure corporations not just for global marketing but for global crises that can now bring down an organization." In addition to organizing the infrastructure, Mitroff says companies should perform complete crisis audits of all company systems, asking what could go wrong in each -- including the worst-case scenarios -- and how each crisis would be managed. "Like total quality management or environmentalism, if crisis management is not done systematically, then it is not being done well," writes Mitroff in his book Managing Crises Before They Happen (2001, AMACOM). How effective is a proactive approach to crisis management? The experts say it's too soon to judge because companies are just now beginning to make efforts to be more proactive. ICM's Smith says that in his experience, "companies that have worked on [crisis management] feel that they have made great progress on heading off a lot of little things that never got to the stage of a real crisis because people have been trained to spot and deal with them."

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