Table
of
Contents

A
THESIS
SUBMITTED
TO
THE
UNIVERSITY
OF
GRONINGEN
FOR
THE
 DEGREE
OF
MASTER
IN
SCIENCE
IN
BUSINESS
ADMINISTRATION
IN
 MARKETING
MANAGEMENT.


THESIS
TITLE:


COMPENSATION
AFTER
A
PRODUCT­HARM
CRISIS:
A
CHOICE­BASED
 EMPIRICAL
INVESTIGATION
OF
CONSUMER
PREFERENCES


AUGUST
27^th,
2010
 


MERRIN
THOMPSON
 S1941984


SUPERVISORS:
DR.
SONJA
GENSLER
AND
DR.
THORSTEN
WIESEL


Table
of
Contents

1.

Introduction... 5


1.1
Problem
Statement... 6


2.

Literature
Review ... 7


2.1
Crisis
Type... 9


2.2
Crisis
Severity...10


2.3
Organizational
Response ...10


2.4
Firm
Moderators ...13


2.5
Consumer
Moderators ...15


2.6
External
Moderators...16


2.7
Fixing
the
Problem:
A
Closer
Look
at
the
Role
of
Compensation...17


2.8
Compensation
Type
and
Amount:
How
Important
is
the
Choice?...19


2.9
Compensation
Timing:
Is
Sooner
Always
Better?...21


3.

Research
Framework
and
Development
of
Hypotheses... 24


3.1
Motivation
of
Proposed
Framework...24


3.2
Development
of
Hypotheses ...25


5.

Research
Methodology ... 28


5.1
Participants...28


5.2
Research
Plan ...28


5.3
Research
Setting
and
Method ...29


6.


Results ...32


6.1
Acceptable,
Most
Preferred
and
Least
Preferred
Compensation
Responses...32


6.2
Crisis
Severity,
Firm
Reputation
and
Media
Source:
Do
they
have
a
Moderating
Effect? ...35


7.
Discussion... 42


7.1
Summary...42


7.2
Managerial
Implications ...44


7.3
Limitations...47


8.
References... 49


9.
Appendices... 56


9.1
Pre‐test
to
determine
Crisis
Severity
Levels...56


9.2
Pre‐test
Results...58


9.3
Final
Survey...63
 



 2
 Index
of
Figures


Figure
1:
Summary
of
Product‐Harm
Crises'
Impact
on
Consumer‐Based
Outcomes ...17
 Figure
2:
Summary
of
the
Impact
of
Compensation
Type
and
Amount
on
Consumer
 Based
Outcomes ...19
 Figure
3:
Proposed
Research
Framework...25
 


Index of Tables

Table
1:
Summary
of
Product‐Harm
Crisis
Management
Research...8


Table
2:
Crisis
Type
Classifications...9


Table
3:
Crisis
Response
Continuums...11


Table
4:
Summary
of
Findings
on
Compensation
and
Timing
in
Service
Failure
or
 Product‐Harm
Crisis
Setting ...22‐23
 Table
5:
Compensation
Response
Strategies...30


Table
6:
Frequency
of
Response
Selected
as
Acceptable...32


Table
7:
Frequency
of
Response
Selected
as
Most
Preferred...33


Table
8:
Frequency
of
Response
Selected
as
Least
Preferred ...34


Table
9:
Acceptable
Responses
with
Significant
Model
Test
Results...35


Table
10:
Model
Summary
for
Acceptable
Responses...35


Table
11:
Test
of
Significance
of
Model
Coefficients
for
Acceptable
Responses ...37


Table
12:
Most
Preferred
Responses
with
Significant
Model
Test
Results ...38


Table
13:
Model
Summary
for
Most
Preferred
Responses ...38


Table
14:
Test
of
Significance
of
Model
Coefficients
for
Most
Preferred
Responses...39


Table
15:
Least
Preferred
Responses
with
Significant
Model
Test
Results...39


Table
16:
Model
Summary
for
Least
Preferred
Responses ...40


Table
17:
Test
of
Significance
of
Model
Coefficients
for
Least
Preferred
Responses...40
 



 4
 



 Abstract


A
 growing
 body
 of
 research
 on
 Product‐Harm
 Crisis
 Management
 has
 brought
 much‐needed
 attention
 to
 the
 importance
 of
 minimizing
 the
 extreme
 damage
 that
 a
 product
 recall
can
have
on
an
organization.
Inevitably,
unforeseen
events
 occur
 and
 firms
 are
 thrown
 into
 an
 unfamiliar
 position
 where
 they
 must
 act
 quickly
 and
 choose
 the
 crisis
 response
 strategy
 that
 will
 give
 them
 the
 best
 chance
 of
 recovering
 to
 pre‐crisis
 levels
of
brand
equity
and
customer
satisfaction.


One
major
part
of
a
crisis
response
strategy
that
has
been
largely
 ignored
 in
 crisis
 management
 literature
 is
 the
 role
 of
 compensation.
Most
of
the
research
in
this
area
is
out‐of‐date
or
 based
in
a
service
failure
setting.
The
purpose
of
this
paper
is
to
 investigate
 the
 optimal
 type,
 amount
 and
 timing
 of
 compensation,
 and
 to
 find
 out
 how
 it
 is
 impacted
 by
 crisis
 severity,
firm
reputation
and
media
source.




Results
 show
 that
 the
 type
 of
 compensation
 is
 more
 important
 than
 the
 amount
 and
 that
 consumers
 are
 willing
 to
 take
 less
 compensation
as
long
as
they
receive
their
ideal
type
or
receive
 it
 immediately.
 Additionally,
 crisis
 severity
 has
 a
 significant
 moderating
 effect
 on
 consumers’
 perceptions
 of
 a
 firm’s
 compensation
offering.


The
 findings
 presented
 in
 this
 paper
 will
 arm
 crisis
 managers
 with
 the
 new
 insights
 on
compensation
 strategies,
 specific
 to
 a
 product
recall
in
the
consumer
goods
industry.
Furthermore,
the
 use
 of
 a
 more
 dynamic
 choice‐based
 experiment
 led
 to
 recommendations
beyond
simply
the
single‐dimension
finding
of
 the
 consumer’s
 view
 of
 an
 ideal
 compensation
 strategy.
 The
 conclusions
 offered
 will
 provide
 managers
 with
 an
 in‐depth
 understanding
of
what
is
most
important
to
consumers
and
how
 firms
can
adjust
their
compensation
strategies
if
their
goals
are
 not
 aligned
 with
 consumer
 expectations,
 or
 they
 are
 not
 financially
 able
 to
 provide
 the
 most
 preferred
 response.


1.

Introduction


Trust
in
corporate
governance
is
lower
than
ever,
with
Toyota
being
the
most
recent
 firm
 to
 join
 the
 company
 of
 Enron,
 Martha
 Stewart,
 Vioxx
 and
 as
 many
 as
 400
 consumer
 products
 a
 year
 that
 are
 pulled
 from
 the
 shelf
 due
 to
 safety
 concerns.


Product‐harm
crises
are
defined
as
complex
situations
wherein
products
are
found
to
 be
 defective,
 unsafe
 or
 even
 dangerous
 (Dawar
 and
 Pillutla
 2000).
 The
 increasing
 complexity
 of
 products,
 more
 demanding
 customers,
 and
 ever‐vigilant
 media
 are
 making
product‐harm
crises
more
frequent
and
compounding
the
damage
(Klein
and
 Dawar
2004).



In
their
2009
annual
report,
the
Consumer
Products
Safety
Commission
reported
8000
 deaths
related
to
unintentional
product
harm
and
in
the
Food
and
Drug
industry,
an
 estimated
20
million
people
have
taken
a
drug
that
was
eventually
recalled.
Regardless
 of
their
cause
(Vassilikopoulou
et
al.
2009),
product‐harm
crises
have
the
potential
to
 do
irreparable
damage
to
a
company’s
image.
Brand
equity,
which
is
arguably
a
firm’s
 most
 valuable
 asset
 (Keller
 2008),
 can
 be
 potentially
 devastated
 by
 publicity
 surrounding
 instances
 of
 defective
 or
 dangerous
 products
 (Dawar
 1998).
 Once
 the
 word
 is
 out,
 the
 news
 creates
 a
 snowball
 effect,
 triggering
 consumer
 confidence,
 market
share
and
stock
prices
to
plummet
overnight.
In
the
wake
of
such
a
crisis,
there
 is
 no
 marketing
 communications
 goal
 more
 important
 than
 ensuring
 the
 situation
 is
 addressed
in
a
manner
that
will
ensure
the
scandalized
company’s
survival.
The
crisis
 response
 strategy
 chosen
 is
 critical
 in
 order
 for
 brand
 equity
 and
 financial
 market
 indicators
 to
 return
 to
 pre‐crisis
 levels
 (Chen
 et
 al.
 2009;
 Mattila
 2009;
 Souiden
 and
 Pons
2009;
Tybout
and
Roehm
2009).



There
are
many
areas
of
product‐harm
crises
that
would
benefit
from
further
research,
 as
noted
in
all
the
literature
published
in
the
last
five
years.
Some
recent
studies
(Chen
 et
al.
2009;
Cleeren
et
al.
2008)
have
attempted
to
quantify
the
financial
consequences
 of
 product‐harm
 crises
 using
 stock
 prices
 and
 scanner
 data.
 A
 limitation
 of
 this
 research
is
that
it
does
not
address
how
the
crisis
response
strategy
impacts
consumer
 attitudes
 and
 behavior
 (Standop
 and
 Grunwald
 2009).
 Siomkos
 and
 Shrivastava
 (1993)
 considered
 consumers’
 attitudes
 to
 be
 the
 most
 effective
 indicator
 of
 crisis
 management
 success
 or
 failure,
 and
 Klein
 and
 Dawar
 (2004)
 stated
 that
 the
 biggest
 loss
 of
 market
 capitalization
 associated
 with
 product
 recalls
 is
 due
 to
 damage
 to
 intangibles
such
as
consumers’
perceptions.



The
 purpose
 of
 this
 research
 is
 to
 improve
 current
 understanding
 of
 the
 impact
 of
 product‐harm
crisis
management
strategies
on
consumer
perceptions.
Since
customer
 dissatisfaction
 can
 have
 a
 profoundly
 negative
 impact
 on
 company
 performance



 6
 (Andreassen
 2001),
 determining
 the
 steps
 to
 take
 to
 optimize
 customer
 satisfaction
 following
a
crisis
event
is
critical.



More
 specifically,
 this
 study
 will
 focus
 on
 the
 contradictory
 findings
 in
 the
 area
 of
 product‐harm
 crisis
 compensatory
 strategies
 (Standop
 and
 Grunwald
 2009)—a
 key
 part
 of
 the
 overall
 organizational
 response
 (Davidow
 2003)
 that
 has
 rarely
 been
 acknowledged
 in
 crisis
 management
 literature.
 Most
 of
 the
 noteworthy
 studies
 on
 compensation
 are
 more
 than
 ten
 years
 old
 and
 were
 performed
 in
 a
 service
 failure
 setting
and
not
in
a
product‐harm
crisis
context
(Estelami
and
de
Maeyer
2002;
Garrett
 1999;
Gilly
and
Hansen
1985).
Although
research
in
a
service
failure
setting
provides
 valuable
 insights
 that
 can
 be
 applied
 to
 a
 product‐harm
 crisis
 context,
 it
 does
 not
 account
for
important
crisis
moderators
such
as
the
level
of
severity,
firm
reputation,
 and
media
source.
The
service
failure
focus
alone
does
not
provide
an
adequate
road
 map
for
crisis
managers
and
leaves
a
gap
that
must
be
addressed.



The
 aim
 of
 this
 research
 is
 to
 gain
 a
 broader
 understanding
 of
 how
 the
 previously‐

mentioned
 moderators,
 impact
 customers’
 judgments
 and
 perceptions
 of
 the
 compensation
type
and
amount
chosen.
Furthermore,
I
will
examine
the
role
of
timing
 and
whether
consumer
preferences
regarding
type
and
amount
change,
depending
on
 the
length
of
time
it
takes
to
receive
the
compensation.
The
findings
will
provide
senior
 management
and
crisis
managers
with
a
deeper
level
of
insight
into
consumers’
minds
 than
 current
 research
 has
 revealed,
 and
 allow
 them
 to
 more
 effectively
 select
 an
 appropriate
compensation
strategy.


1.1
Problem
Statement
 


The
conflicting
findings
on
compensation
type,
amount
and
timeliness,
and
the
untested
 influence
of
crisis
severity,
firm
reputation
and
media
source
on
those
compensatory
 dimensions,
led
to
the
following
problem
statement:


“What is the optimal type, amount and timeliness of compensation in the event of a crisis and how are those three factors impacted by crisis severity, firm reputation and media source?”

2.

Literature
Review


Overcoming
 a
 product‐harm
 crisis
 successfully
 can
 be
 defined
 as
 returning
 all
 components
 of
 brand
 equity
 to
 pre‐crisis
 levels
 or
 better
 (Siomkos
 and
 Kurzbard
 1994).
Previous
research
in
product‐harm
crises
has
addressed
five
elements
that
play
 a
key
role
in
the
successful
handling
of
a
crisis
event:
the
crisis
type
and
locus
of
fault
 (Coombs
1995;
Klein
and
Dawar
2004;
Mattila
2009;
Mitroff
and
Pearson
1993),
the
 level
 of
 crisis
 severity
 (Mowen
 et
 al.
 1980;
 Vassilikopoulou
 et
 al.
 2009),
 the
 organizational
 response
 strategy
 (Siomkos
 and
 Kurzbard
 1994),
 the
 timing
 and
 duration
of
response
(Jorgensen
1996;
Vassilikopoulou
2009)
and
the
message
content
 and
communication
(Alhuwalia
et
al.
2000;
Coombs
1999).



Furthermore,
 several
 factors
 have
 been
 proven
 to
 moderate
 the
 impact
 of
 these
 elements
on
post‐crisis
brand
equity
and
on
financial
indicators
such
as
stock
prices
 and
 market
 share.
 On
 the
 firm
 side,
 moderators
 include
 an
 organization’s
 pre­crisis
 level
 of
 brand
 equity
 (Coombs
 2006;
 Dawar
 and
 Pillutla
 2000);
 perceived
 corporate
 social
 responsibility
 (Chen
 et
 al.
 2009;
 Vassilikopoulou
 et
 al.
 2009)
 and
 crisis
 history
 (Coombs
and
Holladay
1996;
Coombs
2004).
On
the
consumer
side,
prior
trust
(Dawar
 and
 Pillutla
 2000),
 relational
 commitment
 (Alhuwalia
 2002;
 Huang
 et
 al.
 2008),
 past
 experiences
 with
 the
 brand
 (Dawar
 and
 Pillutla
 2000;
 Souiden
 and
 Pons
 2009)
 and
 individual
 traits
 (Laufer
 and
 Coombs
 2006;
 Laufer
 et
 al.
 2005)
 have
 been
 found
 to
 determine
the
strategy’s
effectiveness.
Finally,
all
authors
agreed
that
external
forces,
 such
as
the
media,
regulatory
agencies,
consumer‐generated
online
content
and
word
 of
mouth,
impact
consumer
perceptions
and
future
purchase
intentions
(Siomkos
and
 Kurzbard
 1994,
 Vassilikopoulou
 et
 al.
 2009).
 Due
 to
 the
 difficulty
 of
 measuring
 the
 effect
of
these
types
of
external
influences,
the
contributions
in
this
area
are
limited.


Table
 1
 summarizes
 the
 most
 important
 variables
 covered
 in
 crisis
 management
 research.



 8
 


Table
1:
Summary
of
Product­Harm
Crisis
Management
Research


2.1
Crisis
Type
 


Understanding
the
crisis
type
and
nature
of
the
violation
is
critical
in
knowing
which
 crisis
 response
 strategy
 to
 choose
 (Bradford
 and
 Garrett
 1995;
 Coombs
 and
 Holladay
 1996,
2001;
Pearson
and
Mitroff
1993).
Coombs
and
Holladay
(2002)
were
the
first
to
 propose
 the
 Situational
 Crisis
 Communication
 Theory
 (SCCT).
 SCCT
 uses
 Weiner’s
 (1985;
1986)
attribution
theory
as
the
rationale
for
how
a
crisis
response
should
be
 matched
to
the
crisis
type
and
crisis
factors
(Coombs
2007;
Jorgensen
1994;
Mowen
 1980).



Attribution
 theory
 surfaces
 in
 many
 facets
 of
 crisis
 management,
 since
 stakeholder
 perception
 is
 reality
 when
 it
 comes
 to
 crisis.
 Weiner’s
 (1980)
 attribution
 model
 is
 widely
 accepted
 in
 crisis
 research
 and
 is
 made
 up
 of
 three
 causal
 dimensions:
 locus
 (internal
or
external),
stability
(temporary
or
unchanging)
and
controllability
(within
 control
 or
 uncontrollable).
 Attribution
 theory
 suggests
 that
 perceptions
 of
 causality
 along
stability
and
controllability
dimensions
play
a
role
in
satisfaction
and
judgments
 of
responsibility
(Weiner
2000).
If
the
stakeholders
believe
the
cause
is
external,
see
it
 as
a
one
time
event
and/or
view
the
crisis
as
being
out
of
the
firm’s
control,
they
will
 be
much
more
forgiving
and
a
super­effort
will
not
likely
be
warranted.
If
the
firm
is
at
 fault
and
the
public
feels
the
crisis
could
have
been
prevented,
or
this
is
not
their
first
 incident,
a
proactive
response
strategy
will
be
necessary
to
surmount
the
consumers’


negative
perceptions
of
the
event.
Table
2
depicts
the
key
classifications
of
crisis
types
 identified
in
previous
research.


Crisis
Type
Classifications
 Authors
 External
Economic
Attacks,
External


Information
Attacks,
Mega
Damage,
 Psycho,
Breaks,
Perceptual


Pearson
and
Mitroff
1993


Victim
Cluster,
Accidental
Cluster,


Preventable
Cluster.
 Coombs
and
Holladay
2002;
Coombs
 2007


Internal/Controllable,


External/Uncontrollable
 Coombs
and
Holladay
1996;
Dean
2004;


Jorgensen
1996;
Klein
and
Dawar
2004;


Mattila
2009;



Integrity‐based,


Competence‐based
 Ferrin
et
al.
2005


Table
2:
Crisis
Type
Classifications



 10
 2.2
Crisis
Severity


The
 importance
 of
 crisis
 severity
 can
 be
 explained
 by
 the
 defensive
 attribution
 hypothesis
(Taylor
1991).
This
hypothesis
states
that
the
more
severe
the
outcome
of
 an
 incident,
 the
 more
 blame
 will
 be
 attributed
 to
 the
 party
 that
 is
 potentially
 responsible.
 The
 reason
 for
 this
 type
 of
 information
 processing
 is
 that
 the
 more
 unpleasant
and
severe
consequences
become,
the
less
likely
they
are
perceived
to
be
 accidental
and
the
more
likely
people
feel
that
it
might
happen
to
them
(Laufer
et
al.


2005).
Seeing
the
actions
as
avoidable
and
blaming
the
firm
enables
the
consumer
to
 feel
in
control.
In
a
harm
situation,
one
party
is
assigned
to
the
role
of
perpetrator
and
 the
other
to
the
role
of
the
victim.
In
the
context
of
product‐harm
crises,
consumers
are
 likely
to
view
themselves
as
more
similar
to
the
victim
and
will
attribute
fault
to
the
 firm
because
of
the
natural
human
tendency
to
avoid
blame
(Laufer
et
al.
2005).
The
 firm
 must
 select
 a
 response
 strategy
 that
 accounts
 for
 the
 level
 of
 severity
 and
 addresses
 the
 way
 most
 stakeholders
 attribute
 blame
 (Coombs
 2004;
 Laufer
 et
 al.


2005;
 Vassilikopoulou
 et
 al.
 2009).
 When
 misread,
 crisis
 severity
 can
 become
 a
 significant
corporate
liability.


2.3
Organizational
Response
 


Response
Type

 


Of
all
the
topics
surrounding
crisis
management,
response
type
is
the
most
researched.


It
 is
 also
 referred
 to
 as
 the
 Crisis
 Communicative
 Strategy
 (CCS)
 and
 defined
 as
 the
 actual
verbal
and
nonverbal
responses
an
organization
uses
to
address
a
crisis
(Allen
 and
 Caillouet
 1994;
 Benoit
 1995,
 Siomkos
 and
 Shrivastava
 1993).
 Most
 of
 the
 new
 publications
 continue
 to
 apply
 or
 build
 upon
 the
 categorization
 put
 forward
 by
 Shrivastava
and
Siomkos
(1989).
Their
concept
of
a
company
response
continuum
was
 extended
 further
 by
 Siomkos
 and
 Shrivastava
 (1993)
 and
 Siomkos
 and
 Kurzbard
 (1994),
 and
 has
 since
 become
 the
 benchmark
 for
 the
 majority
 of
 research
 that
 followed
in
the
area
of
crisis
response
strategies.


The
four
types
of
responses
that
constitute
the
company
response
continuum
are
denial,
 involuntary
recall,
voluntary
recall
and
super­effort.
Denial
and
involuntary
recall
have
 been
 classified
 together
 as
 passive
 recall
 strategies
 because
 in
 both
 cases,
 firms
 are
 avoiding
 responsibility
 and
 delaying
 the
 process
 (Chen
 et
 al.
 2009).
 Denial
 occurs
 when
 a
 company
 denies
 any
 responsibility
 for
 the
 crisis,
 while
 involuntary
 recall
 is
 when
a
recall
is
ordered
by
an
agency
(Siomkos
and
Kurzbard
1994).
Agencies
that
are
 typically
 involved
 in
 product‐harm
 crises
 are
 the
 Consumer
 Product
 Safety
 Commission
 (CPSC),
 the
 Food
 and
 Drug
 Association
 (FDA),
 the
 National
 Highway


Traffic
Safety
Commission
(NHTSC)
and
the
U.S.
Securities
and
Exchange
Commission
 (SEC).



Voluntary
 recall
 and
 super­effort
 represent
 
 proactive
 strategies,
 as
 they
 entail
 responding
 to
 complaints
 early,
 issuing
 recalls
 quickly,
 communicating
 extensively
 with
stakeholders
and
providing
compensation
beyond
the
legal
requirement
(Chen
et
 al.
 2009).
 Voluntary
 recall
 is
 when
 a
 company
 chooses
 to
 recall
 a
 product
 before
 governmental
intervention
(Siomkos
and
Kurzbard
1994).
Super­effort
occurs
when
a
 company
 response
 
 demonstrates
 concern
 for
 consumer
 welfare
 by
 being
 socially
 responsible
and
up‐front
in
all
crisis
communications
(Siomkos
and
Kurzbard,
1994).



Most
 of
 the
 existing
 literature
 recommends
 against
 the
 use
 of
 passive
 strategies
 (Dawar
 and
 Pillutla;
 Mattila
 2009;
 Siomkos
 and
 Kurzbard),
 as
 they
 can
 backfire
 and
 alienate
 the
 stakeholders
 further,
 also
 known
 as
 a
 boomerang
 effect
 (Coombs
 2007;


Mattila
 2009).
 Chen
 et
 al.
 (2009)
 contradicted
 conventional
 wisdom,
 finding
 that
 proactive
 strategies
 acted
 as
 a
 red
 flag
 to
 stockholders,
 resulting
 in
 a
 more
 negative
 effect
on
stock
returns
and
financial
indicators
compared
to
a
more
passive
approach.


This
 may
 be
 the
 case
 in
 the
 short‐term
 and
 in
 the
 context
 of
 real‐time
 financial
 measures,
 but
 in
 the
 long‐term,
 it
 has
 been
 suggested
 that
 proactive
 approaches
 contribute
 to
 many
 of
 the
 moderators
 such
 as
 reputation,
 image,
 commitment,
 prior
 trust
and
experiences,
which
ultimately
determine
the
effect
of
the
crisis
management
 strategy
 on
 long‐term
 brand
 equity
 (Chen
 et
 al.
 2009).
 Other
 notable
 continuums
 of
 firm
responses
put
forward
are
summarized
in
Table
3.


Crisis
Response
Continuum
 Authors


Unambiguous
Support,
Ambiguous,


Unambiguous
Stonewalling
 Dawar
1998;
Dawar
and
Pillutla
2000
 Denial,
Excuse,
Justification,
Corrective


Action,
Diversion
 Bradford
and
Garrett
1985;
Coombs


1998;
Huang
et
al.
2005;
Huang
2008
 SCCT:
Deny,
Diminish,
Deal
 Coombs
2006


Table
3:
Crisis
Response
Continuums
 


Many
 publications
 have
 focused
 their
 investigations
 on
 what
 Siomkos
 and
 Kurzbard
 (1994)
deemed
to
be
the
two
ends
of
the
crisis
response
continuum
or
the
double
edged
 sword
(Ferrin
et
al.
2005):
apology
versus
denial.
On
the
one
hand,
an
apology
helps
to
 regain
 consumer
 trust
 and
 reduce
 the
 negative
 impact
 of
 public
 relations
 disasters
 (Mattila
 2009).
 On
 the
 other
 hand,
 apologizing
 can
 be
 viewed
 as
 taking
 complete
 responsibility
for
the
crisis
event,
which
can
lead
to
serious
legal
ramifications.
Denial
 can
come
across
as
a
cover‐up
or
excuse
(Siomkos
and
Kurzbard
1994),
but
can
also
be
 the
best
course
of
action
if
the
crisis
concerns
an
integrity‐based
violation
versus
one
 that
 is
 competence‐based
 (Kim
 et
 al.
 2004;
 Ferrin
 et
 al.
 2005).
 Denying
 culpability,
 especially
 when
 there
 is
 evidence
 of
 innocence
 (Kim
 et
 al.
 2004),
 can
 encourage



 12
 stakeholders
to
give
the
firm
the
benefit
of
the
doubt
(Ferrin
et
al.
2005).
The
denial
 response
 strategy
 should
 not
 be
 ruled
 out
 automatically
 because
 of
 its
 negative
 associations.
Firms
need
to
match
the
response
type
with
the
crisis
type,
in
order
to
 determine
the
best
course
of
action
(Coombs
2007;
Ferrin
et
al.
2005;
Kim
et
al.
2004;


Mattila
2009).


Although
 denial
 can
 be
 the
 best
 course
 of
 action
 in
 a
 few
 specific
 crisis
 scenarios,
 apology
(or
some
form
of
corrective
action)
is
more
commonly
recommended
to
repair
 reputational
damage,
to
regain
trust
and
to
mitigate
negative
publicity.
For
this
reason,
 Coombs
 and
 Holladay
 (2008)
 shed
 light
 on
 the
 existing
 gap
 in
 research
 within
 the
 realm
 of
 the
 apology
 response.
 They
 claimed
 that
 it
 has
 been
 over‐promoted
 as
 the
 best
 response
 and
 unfairly
 compared
 to
 the
 complete
 opposite
 approach
 of
 denial.


Coombs
and
Holladay
(2008)
investigated
other
corrective
actions
and
found
apology,
 sympathy
 and
 compensation
 all
 had
 the
 same
 predictive
 power
 on
 reputation,
 anger
 and
 negative
 word‐of‐mouth
 intention.
 Therefore,
 a
 full
 apology
 is
 not
 always
 necessary
when
executing
a
proactive
strategy.
Expressing
compassion
and
providing
 compensation
are
alternatives
that
merit
consideration.


Timing
and
Duration
of
Response
 


Although
 early
 studies
 that
 investigated
 timing
 found
 no
 direct
 impact
 on
 consumer
 perceptions
 (Jorgensen
 1996;
 Mowen
 et
 al.
 1980),
 recent
 research
 has
 contradicted
 those
findings
(Huang
et
al
2008;
Vassilikopoulou
et
al.
2009).
In
fact,
time
was
found
 to
 be
 the
 most
 important
 factor
 in
 determining
 future
 purchase
 intentions
 when
 the
 crisis
extent
was
high,
such
as
the
advent
of
severe
injuries
or
death
(Vassilikopoulou
 et
al.
2009).
This
is
due
to
the
fact
that
prompt
communication
builds
trust
by
filling
in
 the
 information
 gaps
 that
 result
 from
 threat,
 surprise
 or
 urgency
 surrounding
 crisis
 situations
(Huang
et
al.
2008).



In
addition
to
how
quickly
a
company
responds
to
a
crisis,
the
length
of
time
it
takes
to
 return
to
‘business
as
usual’
has
also
been
found
to
be
significant
(Vassilikopoulou
et
 al.
2009).
As
time
passed,
consumers’
impressions
became
more
positive,
perceptions
 of
danger
diminished
and
future
purchase
intentions
increased,
making
the
duration
of
 the
 response
 strategy
 and
 handling
 of
 a
 crisis
 the
 most
 important
 influence
 on
 consumers’
attitudes
(Vassilikopoulou
et
al.
2009).
Therefore,
it
is
important
to
have
a
 contingency
 plan
 in
 place
 and
 ready
 to
 launch
 at
 the
 first
 sight
 of
 a
 crisis
 to
 both
 respond
to
and
overcome
the
crisis
as
quickly
as
possible.
In
the
wake
of
either
a
high‐


or
 low‐severity
 crisis
 situation,
 initiating
 an
 organizational
 response
 as
 soon
 as
 possible
 is
 more
 important
 than
 the
 type
 of
 strategy
 chosen
 (Vassilikopoulou
 et
 al.


2009).
In
a
medium‐severity
situation,
a
timely
response
is
still
more
important
than
 external
 factors
 or
 level
 of
 corporate
 social
 responsibility.
 Time
 is
 money
 when
 it


comes
 to
 recovering
 the
 pre‐crisis
 level
 of
 consumers’
 willingness
 to
 purchase
 the
 product
again.



Message
Content
and
Communication
 


Once
 the
 approach
 has
 been
 selected,
 the
 second
 part
 of
 the
 organizational
 response
 strategy
 concerns
 what
 is
 said
 to
 stakeholders
 (Huang
 et
 al.
 2008).
 The
 message
 content
must
be
carefully
crafted,
as
it
can
have
a
significant
impact
on
the
success
of
 the
crisis
management
strategy
(Coombs
1999).
Since
the
public
will
make
attributions
 about
 the
 locus
 of
 fault
 for
 the
 crisis,
 what
 a
 firm
 communicates
 can
 influence
 the
 extent
 of
 reputational
 and
 financial
 damage
 (Coombs
 and
 Holladay
 1996).
 The
 communication
 itself
 is
 two‐fold—what
 is
 said
 and
 how
 it
 is
 said.
 One
 of
 the
 most
 valuable
 symbolic
 resources
 in
 a
 crisis
 manager’s
 arsenal
 is
 the
 communication
 of
 compassion.
Expressing
compassion
both
verbally
and
non‐verbally
has
been
found
to
 have
 a
 greater
 effect
 on
 improving
 reputation
 and
 future
 purchase
 intentions
 than
 providing
detailed
information
on
the
crisis
event
(Coombs
1999).



2.4
Firm
Moderators
 


Pre‐Crisis
Level
of
Brand
Equity:
Reputation,
Image
and
Familiarity
 


One
 of
 the
 most
 well
 documented
 moderators
 in
 crisis
 management
 is
 a
 firm’s
 reputation
or
its
pre­crisis
level
of
brand
equity.
Well‐known
companies
are
regarded
 more
 favorably
 in
 cases
 of
 product‐harm
 crises
 (Alhuwalia
 et
 al.
 2000;
 Jolly
 and
 Mowen
 1985;
 Siomkos
 and
 Shrivastava
 1993;
 Siomkos
 and
 Kurzbard
 1994)
 because
 consumers
tend
to
interpret
information
in
the
context
of
prior
expectations
(Dawar
 and
 Pillutla
 2000)
 and
 therefore,
 attribute
 less
 blame
 to
 the
 company
 (Laufer
 and
 Coombs
 2006).
 In
 addition
 to
 enjoying
 less
 of
 a
 negative
 impact,
 highly
 respected
 companies
 have
 also
 been
 found
 to
 recover
 more
 quickly
 (Siomkos
 and
 Shrivastava
 1993).
 A
 high
 level
 of
 pre­crisis
 brand
 equity,
 including
 reputation,
 image
 and
 familiarity,
insulates
companies
from
experiencing
the
same
degree
of
devastation
as
 lesser‐known
firms
(Cleeren
et
al.
2008).
Van
Heerde
(2007)
introduced
the
notion
of
a
 four‐jeopardy
phenomenon
for
brands
with
a
low
pre‐crisis
level
of
brand
equity
and
 market
 share
 that
 fall
 into
 a
 crisis
 situation.
 Lesser‐known
 brands
 experience
 an
 increase
 in
 cross‐sensitivity
 and
 a
 greater
 loss
 in
 baseline
 sales,
 marketing
 effectiveness
and
cross‐impact.
Therefore,
they
suffer
more
and
need
to
make
larger
 investments
than
the
major
brands
to
regain
consumer
confidence.
With
undoubtedly
 smaller
marketing
budgets,
a
crisis
can
prove
fatal
for
relatively
unknown
brands.



 14
 Corporate
Social
Responsibility


Corporate
Social
Responsibility
(CSR)
has
gained
in
importance
in
recent
research,
with
 the
 majority
 of
 Fortune
 500
 companies
 now
 employing
 CSR
 activities.
 Firms
 that
 engage
 in
 such
 socially
 responsible
 behaviors
 are
 likely
 to
 fulfill
 external
 obligations
 such
as
regulatory
compliance
and
stakeholder
demands,
and
also
enjoy
higher
market
 shares
 and
 stock
 market
 performance
 (Waddock
 and
 Smith
 2000).
 The
 consensus
 is
 that
CSR
has
a
significant
impact
on
customer‐related
outcomes
(Luo
and
Bhattacharya
 2006),
 including
 two
 of
 the
 most
 important
 components
 of
 brand
 equity—brand
 evaluations
 and
 purchase
 intentions
 (Klein
 and
 Dawar
 2004).
 Additionally,
 CSR
 has
 been
found
to
have
both
a
“dormant
effect”
and
“halo
effect”
(Klein
and
Dawar
2004).


Prior
 beliefs
 concerning
 a
 company’s
 level
 of
 CSR
 are
 activated
 during
 a
 crisis
 event
 and
consumers’
past
associations
act
as
a
buffer
by
moderating
the
amount
of
negative
 impact
the
firm
might
have
otherwise
experienced.


It
should,
however,
be
noted
that
CSR’s
impact
on
a
firm’s
crisis
management
strategy
 has
been
debated.
Klein
and
Dawar
(2004)
found
that
CSR
had
a
boundary
effect
and
 only
 influenced
 attributions
 for
 customers
 who
 considered
 CSR
 to
 be
 important
 to
 them.
 On
 the
 other
 hand,
 Vassilikopoulou
 et
 al.
 (2009)
 argued
 that
 CSR
 has
 a
 direct
 effect
 on
 consumer
 attitudes
 and
 purchase
 intentions,
 finding
 that
 it
 was
 the
 most
 important
moderator
in
a
low‐crisis
extent
and
more
important
than
external
effects
 across
all
levels
of
crisis
severity.



Crisis
History
 


Unfortunately,
 for
 companies
 encountering
 their
 second
 or
 third
 crisis,
 research
 has
 shown
that
a
severe
crisis,
or
any
crisis
that
was
mishandled,
can
come
back
to
haunt
 you.
 Crisis
 history
 cannot
 be
 ignored
 when
 selecting
 an
 organizational
 response
 strategy.
People
use
the
three
causal
dimensions
when
making
attributions:
stability,
 external
control,
and
personal
control
(Coombs
2004).
Stability
is
impacted
if
a
crisis
 occurs
 a
 second
 or
 third
 time,
 as
 the
 attributions
 transform
 from
 unstable
 to
 stable.


Therefore,
 the
 most
 blame
 will
 be
 attributed
 to
 the
 organization
 when
 the
 cause
 is
 stable,
external
control
is
low
and
personal
control
or
locus
is
internal
(Coombs
2004).


If
 any
 of
 the
 subsequent
 crises
 are
 viewed
 as
 controllable,
 it
 further
 magnifies
 the
 reputational
threat
and
greater
accommodation
is
required
than
would
be
necessary
if
 it
were
the
first
accident
or
transgression
(Coombs
2004;
Coombs
2007).
With
regards
 to
 the
 firm’s
 response,
 it
 would
 mean
 treating
 the
 crisis
 as
 if
 it
 was
 one
 level
 more
 severe
than
the
reality
of
the
situation
(i.e.
low
extent
becomes
medium
and
medium
 extent
becomes
severe).


2.5
Consumer
Moderators
 


Prior
Trust
 


Prior
 trust
 is
 an
 important
 moderator
 of
 the
 crisis
 response
 strategy.
 Trust
 means
 having
 confidence
 in
 the
 other
 party
 and
 is
 positively
 linked
 to
 word‐of‐mouth
 and
 loyalty
behaviors
(Mattila
2009),
which
is
invaluable
in
a
crisis
situation.
Prior
trust
is
 viewed
as
the
level
of
trust
before
a
crisis,
which
acts
as
a
moderator
of
the
impact
of
 the
 organizational
 response
 strategy.
 The
 crisis
 management
 strategy
 as
 a
 whole
 impacts
the
level
of
post‐crisis
trust
as
a
dependent
variable
(Huang
et
al.
2008;
Kim
et
 al.
2009;
Mattila
2009).




Relational
Commitment

 


Relational
 Commitment
 is
 made
 up
 of
 both
 affective
 and
 continuance
 commitment
 (Meyer
and
Allen
1984)
and
is
the
extent
to
which
one
party
feels
that
the
relationship
 is
worth
spending
energy
to
maintain
and
promote
(Huang
et
al.
2008).
Alhuwalia
et
al.


(2000)
 found
 that
 commitment
 is
 an
 important
 moderator
 of
 consumer
 response
 to
 negative
 information,
 as
 response
 patterns
 were
 different
 between
 high‐
 and
 low‐

commitment
consumers.
Although
negative
publicity
has
been
said
to
travel
four
times
 faster
 than
 positive
 news
 (Kroloff
 1988),
 this
 need
 not
 be
 the
 case
 with
 loyal
 customers.
 In
 fact,
 it
 was
 found
 that
 Kroloff’s
 (1988)
 negativity
 effect
 was
 entirely
 absent
among
this
group
of
consumers
and
that
positive
information
about
a
crisis
was
 accepted
 as
 more
 diagnostic
 of
 the
 situation
 (Alhuwalia
 et
 al.
 2000;
 Alhuwalia
 et
 al.


2001).
These
findings
offer
valuable
insights
for
crisis
managers,
in
that
their
response
 strategy
 should
 account
 for
 the
 differences
 between
 these
 two
 customer
 groups
 (Dawar
 and
 Pillutla
 2000).
 Furthermore,
 investments
 made
 towards
 increasing
 the
 base
of
committed
customers
produce
a
far
greater
return
than
what
may
be
evident
 on
paper.
This
group
of
customers
can
actually
stop
the
spread
of
a
crisis
in
its
tracks.



Past
Experiences
 


The
 history
 that
 consumers
 have
 with
 a
 brand
 or
 firm
 is
 relevant
 in
 the
 case
 of
 a
 product‐harm
 crisis,
 because
 their
 direct
 or
 indirect
 past
 experiences
 allow
 them
 to
 retrieve
 pro‐attitudinal
 information,
 which
 reduces
 the
 influence
 of
 the
 crisis
 information
 (Dawar
 and
 Lei
 2009).
 Consumers’
 expectations
 are
 built
 up
 through
 repeated
 transactions
 and
 communications
 (Dawar
 1998)
 and
 just
 like
 a
 firm’s
 reputation
and
CSR
actions,
positive
customer
experiences
on
an
individual
level
can
 act
as
a
buffer
in
a
crisis
situation.




 16
 Individual
Traits



In
addition
to
the
moderating
effect
produced
by
the
differences
in
how
consumers
of
 different
trust
and
commitment
levels
perceive
a
crisis,
individual
consumer
traits
also
 play
 a
 role
 (Laufer
 and
 Coombs
 2006).
 Since
 crises
 are
 events
 where
 people
 seek
 to
 attribute
 blame
 to
 the
 party
 responsible,
 it
 only
 makes
 sense
 that
 how
 people
 make
 attributions
 will
 vary.
 Therefore,
 customers
 should
 also
 be
 segmented
 in
 how
 they
 differ
 in
 their
 reactions
 to
 a
 crisis.
 Factors
 proven
 to
 moderate
 the
 perception
 of
 a
 crisis
 include
 gender
 and
 nationality
 (Laufer
 and
 Coombs
 2006),
 age
 (Laufer
 et
 al.


2006)
and
individual
differences
in
perceptions
of
severity
resulting
in
differences
in
 tolerance
for
ambiguity
(Laufer
et
al.
2005).


2.6
External
Moderators
 


External
 factors,
 such
 as
 the
 media,
 regulatory
 agencies,
 word‐of‐mouth
 and
 consumer‐generated
 online
 content
 have
 a
 significant
 impact
 on
 whether
 or
 not
 a
 crisis
 management
 strategy
 is
 successful
 (Jolly
 and
 Mowen
 1985;
 Siomkos
 and
 Kurzbard
 1994).
 Vassilikopoulou
 et
 al.
 (2009)
 found
 that
 in
 a
 low‐crisis
 extent
 situation,
 external
 effects
 had
 more
 bearing
 on
 the
 outcome
 than
 time
 or
 the
 organizational
 response
 itself.
 Unfortunately
 for
 most
 crisis
 managers,
 the
 media
 is
 more
 influential
 than
 any
 marketer‐driven
 communications.
 Furthermore,
 the
 negativity
 effect
 that
 accompanies
 negative
 news,
 such
 as
 reports
 of
 a
 crisis
 event,
 receives
 quadruple
 weight
 compared
 to
 positive
 news
 (Kroloff
 1988).
 With
 all
 the
 challenges
facing
managers
during
a
crisis
event,
the
media’s
preference
for
reporting
 bad
news
(Mizerski
1982)
adds
to
their
uphill
battle.



On
the
other
hand,
if
the
press
gets
behind
a
company
in
a
crisis,
consumer
perceptions
 of
 danger
 will
 decrease
 and
 their
 future
 purchases
 intentions
 are
 less
 likely
 to
 be
 impacted
 (Siomkos
 and
 Kurzbard
 1994).
 During
 a
 crisis,
 a
 firm
 experiences
 a
 heightened
 level
 of
 attention.
 If
 a
 firm
 is
 fortunate
 enough
 to
 face
 positive
 external
 forces,
it
can
actually
use
the
opportunity
to
improve
customer
perceptions,
reputation
 and
image
(Siomkos
and
Shrivastava
1993;
Dawar
1998).



It
is
extremely
difficult
to
measure
word‐of‐mouth,
rumors
and
the
long‐term
impact
 of
the
media
on
brand
equity,
therefore
a
limitation
in
the
studies
that
have
addressed
 this
moderator
in
an
experimental
setting
is
that
external
effects
were
categorized
as
 merely
positive
or
negative
(Siomkos
and
Kurzbard
1994;
Vassilikopoulou
et
al.
2009).



Figure
1
shown
below,
summarizes
how
the
final
level
of
customer‐based
brand
equity
 following
a
product
harm
crisis
is
impacted
by
the
firm
reaction,
which
is
moderated
 by
the
firm,
consumer
and
external
factors
previously
discussed.


Figure
1:
Summary
of
Product­Harm
Crises'
Impact
on
Consumer­Based
Outcomes


2.7
Fixing
the
Problem:
A
Closer
Look
at
the
Role
of
Compensation
 


Once
a
corrective
action
is
determined
to
be
the
appropriate
approach,
the
firm
must
 decide
whether
to
repair
the
product
if
it
is
a
tangible
good,
to
replace
the
product
or
 service,
to
provide
monetary
compensation
or
to
over­compensate
the
affected
parties.


Over­compensation
 would
 be
 part
 of
 a
 super­effort,
 since
 it
 involves
 providing
 compensation
and
information
over
and
above
what
is
expected
(Vassilikopoulou
et
al.


2009).
In
complaint
management
literature,
additional
effort
to
surpass
expectations
 has
 also
 been
 referred
 to
 as
 delighting
 the
 customer
 (Andreassen
 2001;
 Rust
 and
 Oliver
2000).
Over­compensation
can
be
anything
from
reimbursing
the
customer
with
 more
 than
 they
 paid
 for
 a
 product
 or
 service
 or
 replacing
 the
 product
 and
 including
 additional
line
extensions
or
bonus
gifts
for
their
troubles.



Returning
 a
 customer
 to
 their
 starting
 point
 or
 better
 before
 the
 dissatisfaction
 occurred
 is
 known
 as
 redress
 in
 complaint
 management
 literature
 (Davidow
 2003;


Gilly
 1987;
 McCollough
 2000;
 Goodwin
 and
 Ross
 1992).
 A
 good
 recovery
 effort
 has
 been
 found
 to
 have
 a
 positive
 impact
 on
 customers’
 future
 purchase
 intent
 and
 perceptions
 of
 the
 company
 (Andreassen
 2001).
 In
 the
 context
 of
 a
 product‐harm
 crisis,
 it
 means
 returning
 all
 customer‐based
 brand
 equity
 components
 to
 pre‐crisis



 18
 levels
 or
 better,
 which
 is
 the
 goal
 of
 any
 manager
 faced
 with
 a
 crisis
 event.


Furthermore,
 the
 compensatory
 measures
 chosen
 are
 of
 central
 importance
 and
 critical
 to
 how
 the
 entire
 crisis
 management
 strategy
 is
 evaluated
 by
 consumers
 (Davidow
 2003;
 Standop
 and
 Grunwald
 2009).
 No
 firm
 wants
 to
 get
 into
 a
 double
 deviation
situation
(Bitner
et
al.
1990),
where
the
response
and
compensatory
action
 taken
are
perceived
as
inadequate
and
the
negative
evaluation
is
magnified.



It
is
logical
to
apply
findings
from
complaint
management
research
to
a
product‐harm
 crisis
 setting,
 because
 both
 are
 about
 transforming
 a
 dissatisfied
 customer
 into
 a
 satisfied
 one
 after
 a
 negative
 experience.
 Given
 the
 lack
 of
 research
 involving
 compensatory
 measures
 after
 a
 crisis
 event
 specifically,
 there
 is
 a
 great
 need
 to
 test
 this
 connection
 to
 complaint
 management
 literature.
 Although
 they
 have
 a
 lot
 in
 common,
it
is
highly
conceivable
that
consumers
might
react
differently
after
a
crisis
 such
as
accidents
involving
death
compared
to
a
problem
where
a
household
appliance
 does
not
perform
to
the
level
expected.
Furthermore,
this
added
severity
might
amplify
 the
compensation
needs
of
the
customer
and
change
how
they
evaluate
the
recovery
 efforts
of
the
firm.


Whether
or
not
customers
are
satisfied
with
the
corrective
action
of
a
firm
is
rooted
in
 justice
theory,
because
it
is
based
on
whether
or
not
they
perceive
the
firm’s
efforts
to
 be
fair
(de
Matos
et
al.
2009;
Homburg,
Furst
and
Koschate
2010;
Smith
et
al.
1999).


The
 three
 dimensions
 of
 perceived
 justice
 are
 distributive
 justice,
 interactional
 justice
 and
procedural
justice.
Distributive
justice
is
the
evaluation
of
fairness
regarding
how
 the
 compensation
 is
 allocated
 versus
 the
 costs
 involved
 (Goodwin
 and
 Ross
 1992).


Interactional
justice
is
the
evaluation
of
the
recovery
process
itself
(McCollough
et
al.


2000),
which
in
a
product‐harm
crisis
setting
would
mean
the
organizational
response
 chosen.
Interactional
Justice
has
been
found
to
be
the
most
important
in
the
recovery
 process
 (Blodgett,
 Hill
 and
 Tax
 1997).
 Finally,
 procedural
 justice
 has
 to
 do
 with
 the
 fairness
 of
 the
 policies,
 procedures
 and
 criteria
 used
 to
 come
 to
 a
 decision
 and
 is
 reflective
 of
 timeliness,
 responsiveness
 and
 the
 convenience
 of
 the
 process
 itself
 (Blodgett,
Hill
and
Tax
1997).



Key
consumer‐based
outcomes,
such
as
future
purchase
intentions,
perceptions
of
the
 company’s
image,
satisfaction
and
the
likelihood
of
spreading
negative
word‐of‐mouth,
 are
all
dependent
upon
the
consumer’s
perception
of
justice
(Blodgett,
Granbois
and
 Walters
1993;
Gilly
1987;
Goodwin
and
Ross
1989).
Whether
a
company
denies
blame
 or
apologizes
for
an
incident
mediates
the
perceived
fairness
of
their
recovery
efforts
 (de
Matos
et
al.
2009;
Goodwin
and
Ross
1982;
McCollough
et
al.
2000).
Furthermore,
 many
variables
have
been
found
to
moderate
how
the
consumer
evaluates
the
fairness
 of
 the
 compensation
 offered.
 These
 include
 timing
 of
 compensation
 (Davidow
 2003;


Smith
et
al.
1999);
perceived
level
of
crisis
severity
(Smith
et
al.
1999;
de
Matos
et
al.


2009);
customer
characteristics
such
as
demographics
and
psychographics
(de
Matos
 et
al.
2009;
Homburg,
Furst
and
Koschate
2010);
product
importance
(Homburg,
Furst


and
 Koschate
 2010);
 attribution
 of
 responsibility
 (Folkes
 1984);
 and,
 finally,
 consumers’
past
purchase
history
(Estelami
and
De
Maeyer
2002).



Figure
2
shown
below,
is
a
summary
of
how
customer‐based
brand
equity
following
a
 product‐harm
 crisis
 is
 impacted
 by
 the
 compensation
 type
 and
 amount,
 which
 is
 moderated
 by
 several
 factors.
 The
 ensuing
 compensation
 offering
 is
 mediated
 by
 a
 customer’s
 evaluation
 of
 fairness,
 which
 happens
 automatically
 and
 subconsciously
 based
on
the
characteristics
of
the
crisis
scenario
at
hand.


Figure
2:
Summary
of
the
Impact
of
Compensation
Type
and
Amount
on
Consumer­

Based
Outcomes
 


2.8
Compensation
Type
and
Amount:
How
Important
is
the
Choice?


Deciding
on
how
to
proceed
is
critical,
because
compensatory
measures
signify
result‐

related
qualities
that
stakeholders
take
into
account
when
evaluating
the
outcome
of
 the
chosen
crisis
management
strategy
(Davidow
2003;
Standop
and
Grunwald
2009).


Furthermore,
 the
 compensatory
 strategy
 adopted
 sets
 a
 precedent
 for
 future
 crises
 and
complaints
(Standop
and
Grunwald
2009).



Many
factors
must
be
taken
into
account
when
selecting
which
option
to
choose.
First
 of
all,
monetary
compensation
may
be
pleasing
to
customers,
but
it
can
mark
the
end
of
 the
 business
 relationship
 (Standop
 and
 Grunwald
 2009).
 Also,
 it
 may
 be
 more
 appropriate
in
some
circumstances
and
not
others.
Smith
et
al.
(1999)
found
that
the
 compensation
 should
 match
 the
 customer’s
 loss.
 Therefore,
 it
 could
 be
 argued
 that
 monetary
compensation
is
only
advisable
when
the
consumer
has
incurred
a
financial
 loss,
or
a
serious
danger
to
personal
health
and
wellbeing
exists.



 20
 Replacing
or
repairing
a
product
helps
to
ensure
loyalty
for
at
least
one
more
lifetime
 of
the
product
and
signals
that
they
are
confident
in
its
ability
to
perform
in
the
future,
 but
a
customer
might
be
expecting
more
in
a
crisis
situation.
No
research
comparing
 the
 effects
 of
 replacing
 versus
 repairing
 a
 product
 has
 been
 performed
 in
 either
 a
 service
failure
or
product‐harm
crisis
setting.
If
a
customer’s
safety
is
at
risk,
there
is
a
 possibility
 that
 they
 may
 not
 be
 comfortable
 with
 a
 repair
 on
 the
 original
 tainted
 product.
Additionally,
although
most
customers
might
prefer
a
replacement,
perhaps
it
 would
 not
 be
 the
 case
 if
 it
 meant
 waiting
 an
 extra
 month.
 Finally,
 no
 studies
 have
 tested
 different
 types
 of
 over­compensation
 against
 each
 other
 such
 as
 over­

compensation
with
repair
versus
over­compensation
with
replacement.
All
research
on
 over­compensation
has
pinned
it
against
partial
or
full
compensation,
providing
results
 on
amount
rather
than
type.


Crisis
 managers
 might
 assume
 that
 recovery
 efforts
 justified
 in
 a
 normal
 complaint
 setting
 are
 not
 enough
 to
 curtail
 the
 amplified
 customer
 dissatisfaction
 that
 accompanies
 a
 product‐harm
 scenario,
 especially
 if
 personal
 safety
 was
 ever
 at
 risk.


However,
rushing
into
a
super­effort
and
over­compensating
the
affected
parties
is
not
 always
necessary
or
advisable.
Although
it
would
seem
that
over­compensation
would
 be
 the
 obvious
 course
 of
 action
 in
 a
 crisis,
 the
 findings
 are
 mixed,
 in
 terms
 of
 the
 outcome
on
consumer
perceptions
(Davidow
2003;
Standop
and
Grunwald
2009).



Boshoff
(1997)
and
Gilly
and
Gelb
(1992)
determined
over­compensation
to
be
the
best
 course
of
action
in
a
crisis.
McCollough
et
al.
(2000)
found
that
both
full
compensation
 and
over‐compensation
yielded
positive
results.
Furthermore,
research
that
supports
 over­compensation,
 proposed
 that
 there
 is
 a
 recovery
 paradox,
 where
 it
 is
 not
 only
 possible
 to
 eliminate
 negative
 perceptions,
 but
 customer
 loyalty
 and
 satisfaction
 can
 actually
be
improved
through
the
proper
handling
of
a
negative
situation
(Blodgett
et
 al.
1993;
Goodwin
and
Ross
1992).



Davidow’s
 (2003)
 plateau
 effect
 suggested
 that
 a
 threshold
 exists
 past
 which
 compensation
 no
 longer
 has
 a
 significant
 effect
 on
 the
 reduction
 of
 customer
 dissatisfaction.
 Although
 recovery
 efforts
 were
 found
 to
 have
 a
 positive
 effect
 on
 satisfaction,
even
an
excellent
recovery
can
only
restore
repatronage
intent
and
image
 to
 their
 original
 levels
 and
 no
 more
 (Andreassen
 2001).
 Estelami
 and
 de
 Maeyer
 (2002)
 looked
 beyond
 this
 threshold
 and
 identified
 a
 double
 deviation
 effect,
 where
 over­compensation
 actually
 increases
 the
 existing
 dissatisfaction
 of
 stakeholders
 by
 reducing
 their
 opinions
 and
 evaluations
 of
 the
 firm.
 Over‐compensating
 can
 make
 a
 firm
seem
desperate,
thus
diminishing
its
image
and
affecting
the
ability
to
charge
the
 same
premium
that
pre‐crisis
levels
of
brand
equity
allowed.


2.9
Compensation
Timing:
Is
Sooner
Always
Better?


One
 would
 expect
 that
 the
 sooner
 a
 customer
 receives
 compensation
 the
 better,
 but
 the
findings
are
conflicting
where
timing
is
concerned.
Although
customers
might
not
 want
 compensation
 delayed,
 the
 conflicting
 findings
 in
 research
 lie
 in
 the
 fact
 that
 timing
 is
 not
 always
 as
 important
 as
 firms
 might
 think.
 Gilly
 and
 Gelb
 (1982)
 found
 that
 time
 was
 not
 important
 for
 customers
 who
 suffered
 a
 monetary
 loss,
 while
 Blodgett,
Hill
and
Tax
(1997)
found
that
timeliness
had
no
impact
on
repatronage
or
 negative
 word‐of‐mouth
 intentions.
 Other
 research
 has
 highlighted
 differences
 in
 perceived
 and
 actual
 timeliness,
 finding
 that
 only
 perceived
 timeliness
 impacted
 satisfaction
 (Gilly
 1987).
 Smith
 et
 al.
 (1999)
 found
 that
 the
 recovery
 effort
 should
 match
the
failure.
Therefore,
timing
was
not
significant
when
providing
distributive
or
 interactional
 justice.
 Finally,
 Boshoff
 (1997)
 and
 Davidow
 (2003)
 suggested
 that
 timeliness
is
only
important
after
an
unreasonable
delay
and
that
otherwise,
it
was
not
 a
critical
moderator
of
a
customer’s
evaluation
of
the
recovery
process.



On
 the
 other
 hand,
 there
 is
 support
 for
 the
 obvious
 notion
 of
 
 “sooner
 is
 better”.



Several
authors
agreed
that
the
quicker
the
response,
the
more
positive
the
impact
on
 customer
 satisfaction
 (Conlon
 and
 Murray
 1996;
 Davidow
 2003;
 Smith
 et
 al.
 1999).


Gilly
 and
 Gelb
 (1982)
 showed
 that
 it
 was
 significant
 for
 non‐monetary
 losses
 and
 Smith
et
al.
(1999)
found
that
timing
is
important
when
the
failures
are
procedural
in
 nature.
Conlon
and
Murray
(1996)
reported
that
compensation
efforts
that
would
have
 otherwise
led
to
increased
customer
satisfaction
were
muted
when
the
recovery
effort
 was
tardy.




Table
 4
 summarizes
 the
 different
 findings
 regarding
 what
 type
 and
 amount
 of
 compensation
 is
 advisable
 in
 a
 complaint
 or
 product‐harm
 setting.
 Furthermore,
 it
 displays
 the
 different
 views
 on
 whether
 or
 not
 timing
 is
 an
 important
 moderator
 of
 how
the
compensation
or
recovery
effort
is
perceived
by
customers
and
how
it
impacts
 satisfaction,
image,
future
purchase
and
negative
word‐of‐mouth
intentions.




 22


Author(s)
and
Article
 






Goal
 






Sample
 





Findings
 Rust
and
Oliver
(2000).



“Should
We
Delight
the
 Customer?”







Explored
whether
going
 over‐and‐above
or


‘delighting’
customer
 raises
expectations,
 making
it
more
difficult
 to
satisfy
them
again
in
 the
future.


No
sample.
Mathematical
 model
based
on


assumptions
from
 customer
satisfaction
 literature
in
a
non‐

Product
Harm
setting.


Going
over
and
above
to
satisfy
a
customer
 is
not
cost‐effective,
since
it
is
expensive
to
 maintain
satisfaction
at
the
new
level
of
 expectation.
Delighting
the
customer
is
 only
advisable
in
the
context
of
the
 negative
impact
it
has
on
the
competition.


Goodwin
and
Ross
 (1992).
“Consumer
 Responses
to
Service
 Failures”


Conducted
an


experiment
to
find
out
if
 service
failures
are
 influenced
by


perceptions
of
fairness.


2x2x2x4
between‐

subjects
design
with
 manipulated
levels
of
 complaint
outcome,
 apology,
voice
and
type
 of
service.
285
subjects.


Apology
and
Voice
are
more
effective
 when
accompanied
with
something
 tangible,
but
the
tangible
remedy
need
not
 be
high
to
please
customers.


Andreassen
(2001).


“From
Disgust
to
Delight.


Do
Customers
Hold
a
 Grudge?”


Investigated
the
effect
 that
satisfaction
has
on
 complaining
customers’


future
purchase
intent
 and
future
perception
of
 the
firm.


Based
on
a
posttest‐only
 design
with


nonequivalent
groups.


200
existing
customers
 of
various
service
 providers
were
 interviewed.


Recovery
efforts
do
have
a
positive
impact
 on
future
purchase
intent
and
perceptions.


No
support
for
recovery
paradox,
as
 excellent
recovery
only
restores
levels
of
 image
and
intent.



Blodgett
et
al.
(1993)


“The
Effects
of
Perceived
 Justice
on
Complainants
 Negative
WOM
Behavior
 and
Repatronage
 Intentions”


Assessed
the
effects
of
 perceived
justice
on
 Negative
WOM
Behavior
 and
future
purchase
 intention
in
a
retail
 environment.



201
surveys
completed


to
create
a
model.
 Dissatisfied
customers
are
willing
to
give
 retailers
a
second
chance
after
they
have
 been
let
down,
if
they
perceive
the
retailer
 as
being
fair.
They
may
actually
become
 more
loyal.


Conlon
and
Murray
 (1996).


“Consumer
Perceptions
of
 Corporate
Responses
to
 Consumer
Complaints:


The
Role
of
Explanations”


Based
on
justice
and
 impression


management
literature,
 authors
examined
how
 explanation,


compensation,
severity
 and
speed
of
reaction
 impacted
consumer
 perceptions.


143
business
students
 wrote
complaint
letters
 about
49
different
 products.
121
firm
 responses
were
received
 and
surveys
were
filled
 out
based
on
company
 reaction.


Coupons
and
other
reimbursement
led
to
 more
favorable
customer
reactions.


Favorable
reactions
were
muted
when
the
 company
was
perceived
to
be
tardy
in
 responding.


McCollough
et
al.
(2000)


“An
Empirical


Investigation
of
Customer
 Satisfaction
After
Service
 Failure
and
Recovery”


Explored
“recovery
 paradox”
and
find
out
if
 customers
can
be
even
 more
satisfied
than
 before
after
superior
 recovery
efforts.



Explored


disconfirmation
and
 how
justice
dimensions
 impact
satisfaction.


2
Studies:
1)
2x3
 between
subjects
 manipulating
recovery
 expectations
(and
 service
performance
2)
 2x3
between
subjects
 manipulating
levels
of
 distributive
and
 interactional
justice.


Used
scenarios
and
 measured
satisfaction
 before/after.


Full
or
over‐compensation
as
a
positive
 impact
on
customer
satisfaction
following
 a
product‐harm
crisis.
Found
no
support
 for
“recovery
paradox”.
Instead
found
 possibility
for
“double
deviation”
if
 recovery
is
inferior.



De
Matos
et
al.


(2009)


“Consumer
reaction
to
 service
failure
and
 recovery:
the
moderating
 role
of
attitude
toward
 complaining”


Investigated
how
 attitude
towards
 complaining,
severity
 and
perceived
justice
 impact
customer
 satisfaction.



204
students
who
 experienced
a
service
 failure
answered
a
 survey.


Supports
that
customer
characteristics,
 such
as
attitude
towards
complaining,
had
 significant
effect
on
satisfaction.
Proved
 that
severity
and
perceived
justice
 influence
satisfaction,
which
impacts
WOM
 and
repatronage
intentions.


Blodgett,
Hill
and
Tax

 (1997)


“The
Effects
of


Distributive,
Procedural,
 and
Interactional
Justice
 on
Postcomplaint
 Behavior”


To
further
examine
 linkage
between
 perceived
justice
and
 postcomplaint
behavior
 and
assess
the
effects
of
 the
three
dimensions
of
 justice
on
repatronage
 and
negative
word
of
 mouth
intentions.


3x2x2
between
groups
 design
with
3
levels
of
 distributive,
2
levels
of
 interactional
and
2
levels
 of
procedural.
265
MBA
 students
participated
 and
were
given
one
of
12
 scenarios.


Interactional
justice
had
the
strongest
 effect
on
postcomplaint
behavior.
Found
 that
procedural
justice
(timeliness)
had
no
 impact
on
repatronage
or
negative
WOM,
 although
the
difference
in
timing
was
only
 a
day.