Why it pays to take the drama out of a crisis


Brand equity can suffer significantly during a crisis, with profound and enduring effects on subsequent corporate performance. A pioneering study by Max Backhaus and Marc Fischer from the University of Cologne has found that acts of corporate misbehavior, such as bribery or corruption, can have a deeper and more enduring impact than product failure and recall. Max Backhaus explains.

It is well established that when companies’ products cause real (albeit unintended) harm to consumers – such as supermarkets selling tainted or infected food products, which are then recalled – both brand equity and corporate financial performance suffer as a result. The scale and duration of this impact depends on a number of factors, including a brand’s track record and established consumer goodwill, as well as how quickly brand custodians respond to the crisis.

Much less well understood are the effects of companies and corporate leaders behaving badly. In the first study of its kind and depth undertaken, our research group has assessed for the first time the impact on companies shown to be guilty of corporate social irresponsibility (CSIR) or misbehavior, such as bribery.

Types of crisis events

The accepted academic definition of corporate brand crises is “unexpected events that threaten a brand’s perceived ability to deliver expected benefits, thereby weakening brand equity.” We set out to investigate the effects of brand crisis events on consumer brand ratings. We were keen to know how corporate social irresponsibility damages brand equity and how this compares with product crises. We also wanted to learn how strong the effects are, how persistent the damage is, and how long they endure. Lastly, we looked to identify factors that amplify and attenuate brand damage effects.

The study analyzed the impact of more than 200 different crisis events over 5 years, encompassing 69 brands from a dozen industry sectors. The crisis events covered both product failure and corporate social misbehavior, and we estimated the immediate and cumulative brand damage effect of each crisis as well as the duration of that effect. In addition, we identified the key drivers that reveal the conditions under which a crisis event can develop into a severe crisis. It is worth noting that the events studied all took place in Germany, and the consumer responses tracked were those of German consumers.

The principal measures used to analyze the impact and effects of the crises study included YouGov’s Brand Index (see table, below), advertising spend allocated before, during, and after the crisis (Ebiquity), and consumer interest shown by search trends and terms (Google Trends). YouGov’s Brand Index score is particularly sensitive and revealing, as it tracks brand perception weekly. In this study, the data sets analyzed covered 254 weeks, from 2008–2012.

The study found that brand damage is, in fact, greater for corporate social misbehavior than it is for product failure. CSIR crises are deeper and last longer than product harm crises, and the cumulative effect is equivalent to a 78 percent loss in brand perception ratings, compared with 50 percent for product harm crises.

The surprising results may be explained thus. Product failures are often believed to be the result of bad luck, and they’re very rarely caused deliberately. It’s certainly true that the salmonella crisis that struck Cadbury in 2006 and 2013’s horsemeat scandal that dented many European food retailers and manufacturers were the result of corner-cutting and inadequate health and safety controls. Yet even the most hardened critic is unlikely to level charges of deliberate wrong-doing. This contrasts starkly with CSIR, where the failing is both the deliberate wrong-doing and being found out.

The study also showed that media coverage significantly amplifies brand damage, while higher brand strength serves as a shield to protect brands in the long term. Crises typically dent reputation for ten weeks, with the strongest impact three to four weeks after the crisis hits, although the impact can last much longer, depending on both responsibility and reaction in the corporation at question. Sales losses, too, are by no means immediate and may take months to unfold.

We concluded that this study into the anatomy and consequences of reputational crises should help brand managers forecast the impact that future crises will have on brand equity and time to recovery, as well as providing them with guidance and a toolkit for appropriate reactions. We recommend that brand custodians invest in brands to protect against the danger of crises, as well as keenly monitor media coverage to predict the depth and duration of the crisis.

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