Crisis

Crisis is a very important label when managing an organization. When a situation is designated as a crisis, it means that attention and resources will be focused on that concern. Crises have implications for corporate reputations because, as experts agree, crises damage reputations. Scandals and accidents are specific types of crises that have unique effects on corporate reputations. This entry defines the term crisis and examines scandals and accidents as critical crisis types. It also discusses how the distinctions between integrity and competence crises and stakeholders’ perceptions of the organization’s level of responsibility for the crisis are important when identifying the crisis type.

Specifying the Parameters of a Crisis

In general terms, a crisis is a breakdown that creates stress in a system. But this is too general to be of much use for managers. The definition must be more precise to have meaning in the organizational context. An organizational crisis can be defined as the perception of an unpredictable event that threatens important expectancies of stakeholders related to health, safety, environmental, and economic issues, and can seriously affect an organization’s performance and generate negative outcomes. This is a lengthy definition, so it is important to unpack its key elements and their implications for managers.

While we can anticipate a crisis, we cannot predict exactly when most crises will occur. As a result, there is an element of uncertainty that surrounds crises. Stakeholders can be the ones defining the situation as a crisis. It could be stakeholders considering a product to be harmful or corporate practices to be irresponsible. Consider how in the 1990s online customer concerns about a very minor flaw in a Pentium chip eventually forced the company to recall the chip. Or how concerns over the treatment of workers forced an overhaul of the supply chain process in the apparel industry.

Stakeholders perceive potential crises when organizational behavior does not match expectations they consider to be important. For instance, trains should not derail, and a frozen dinner should not give you food poisoning. If managed improperly, a crisis can damage an organization’s stock price, market share, and reputation. Moreover, a crisis could injure or kill stakeholders such as employees, customers, or community members. Crises can have serious negative ramifications for stakeholders and organizations. Therefore, organizations must seek the best solutions when trying to mitigate or manage a crisis. Crisis communication is an integral part of effective crisis management and efforts to protect reputational assets.

There are two macro types of organizational crises: (1) operational and (2) reputational. An operational crisis is a threat to the functioning of the organization. A severe snowstorm can disrupt airline flights, a fire can reduce production, and an industrial accident can stop production. Crisis management was designed originally to address operational crises. Organizations knew that to survive a crisis they had to minimize operational disruptions from the crisis. The related discipline of business continuity works with crisis management to reduce operational disruptions. Operational crises typically create victims because these crises can generate injuries and property damage. An explosion at a chemical facility, for instance, threatens the safety of employees and people living and working near the facility.

A reputational crisis occurs when there is a major event that has the potential to threaten an organization’s good name or upset the collective perceptions, estimations, or attributions held by its relevant stakeholders. An operational crisis does some reputation damage, and a reputational crisis could escalate to the point of disrupting operations. However, it is useful to think about crises that are predominantly operational or reputational.

Reputational crises typically do not involve public safety or have stakeholder victims. In a reputational crisis, the primary danger is to the organization rather than to the stakeholders. The lack of victims and the emphasis on harm to the organization is a significant departure from operational crises. The differences between scandals and accidents provide a chance to elaborate on these basic crisis types. Crisis type is an important concept for managers because it provides a frame that stakeholders can use to interpret the crisis event. Research in communication and marketing has documented that different crisis types pose different levels of threat to organizational assets, including reputations. It is important to consider the differences between the various types of crises and why those differences matter to reputations.

The idea of crisis types is closely related to framing. The crisis type tells people how to interpret the event. These interpretations can be very important in the crisis situation. The difference between scandals and accidents highlights critical differences between the two macro crisis frames that have implications for corporate reputations.

Scandals

A scandal involves some action that creates public outrage because it is considered illegal or immoral. In a scandal, there are intentional actions taken by members of an organization that are illegal or immoral. Examples of scandals are when executives at Tyco embezzled millions of dollars from the company and when the CEO of GoDaddy posted a video of his elephant kill while in Africa. One act was illegal, and the other was deemed immoral, but both were intentional and generated public outrage. Trust violation research provides one means of understanding the implication of a situation being labeled a scandal and of unpacking the relevance of crisis type.

Trust violation research draws a distinction between integrity- and competency-based trust violations that can inform the macro crisis types. The integrity violation is intentional and raises questions about the violator’s morals. The competency violation is unintentional and raises questions about the violator’s technical competency for performing a task. Whether a trust violation is framed as integrity or competence based affects how people react to the trust violation and the communicative response that will work best to repair it. A scandal is a form of integrity violation. In the two examples presented earlier, the management at each organization was considered to have purposefully acted immorally through stealing money and killing a member of a threatened species, respectively.

At this point, it is helpful to integrate the operational and reputational crisis distinction into the discussion to explore further the distinction between integrity-based crises, such as scandals, and competency-based crises. While scandals are integrity based, not all scandals have the same impact on an organization. Returning to the two examples discussed earlier, the Tyco and GoDaddy trust violations have some differences. The vast majority of stakeholders would consider the Tyco embezzlement to be a scandal and be outraged by the actions of the executives. Moreover, Tyco illustrates that reputation and operational concerns can be closely related. While embezzlement is a reputational damage, the extent of the Tyco case placed the corporation’s future in doubt and created operational concerns. The GoDaddy case, however, created outrage among a small number of stakeholders. Not everyone knew about the case, while many stakeholders really do not care about the plight of elephants in Africa. In this case, the scandal was primarily a reputational crisis and was not too difficult to manage. There was outrage expressed by some customers, but the crisis quickly disappeared from public view and the public mind. For reputational crisis management efforts, it does matter what percentage of stakeholders are likely to become outraged by the scandal. The greater the number of stakeholders that become offended and outraged, the more threatening the crisis is to the organization’s reputation.

Accidents

Accidents typically are considered unintentional and unexpected events that result in damage or harm. There is a sense that accidents happen by chance rather than being deliberate. If a lightning strike causes an explosion at a manufacturing facility, it is viewed as a chance event and an accident. The exploration of accidents allows us to expand our understanding of the effects of crisis types on crisis communication and corporate reputations.

From a definitional perspective, the scandal and accidents macro crisis types are very different. The moral violation of the scandal creates a difficult crisis to manage because stakeholders attribute a great deal of responsibility for the crisis to the organization. In turn, the perceived crisis responsibility is very damaging to the organization’s reputation, and reputational repair becomes difficult and expensive. An accident tends to be much easier to manage. An accident can be associated with a competency-based violation when the event is a result of improper job execution by an employee. With accidents, there often are minimal perceptions of crisis responsibility, resulting in a minor reputational threat. An accident crisis can be much easier, and often less costly, to manage than a scandal because of the differing effects of the crisis frames on stakeholders.

There can, however, be serious ramifications for reputations and crisis communication with perceptions of accidents as well. Closer investigation of the accident might find that the cause of the accident was a deliberate disregard for safety protocols. Such was the case of the explosion at the BP facility in Texas City, Texas, in 1995. Management deliberately had employees circumvent the safety procedures. The resulting explosion killed 15 people at the facility. Thus, what appears to be an accident could be redefined as a scandal. An example will help illustrate the framing nature of crisis types and its importance to crisis communication and corporate reputations.

Imagine a scenario where there is an explosion at a pharmaceutical manufacturing facility. A total of 20 employees are injured; five are hospitalized in a critical condition. The local homes and businesses are evacuated for 24 hours because of the hazardous chemicals released by the explosion. The situation creates questions about what resulted in the crisis. Some possible causes are the explosion in the natural gas line running into the facility, a technical failure of equipment at the facility, management cutting corners and costs by encouraging employees to engage in unsafe practices, or human error by an employee. Each of the four options represents different frames for the cause of the crisis and results in different stakeholder reactions to the crisis and the organization in crisis. Both the frame of a gas line failure and the frame of a technical failure of equipment would generate low levels of crisis responsibility and represent a low threat to the corporate reputation. These are both accidents—chance events. We need to consider the scale of the accident as well. An accident that seriously damages a facility while causing injuries and death is a more serious crisis than a minor fire that disrupts production for a few hours. When there are victims and harm to others, the crisis places greater demands on the crisis managers. The crisis also becomes more complicated when public safety enters the equation.

Both the employee error frame and the management cutting corners frame generate a high level of crisis responsibility and represent a high threat to the corporate reputation. It seems odd, but stakeholders often treat human error by employees as a form of scandal. Rightly or wrongly, many people believe that management should be able to ensure that employees execute their jobs properly at all times.

Conclusion

The term crisis is used in many ways in common usage, but it means something very specific inside organizations. Different types of crises threaten corporate reputations in different ways, so there is value in crisis managers carefully assessing the crisis type they are facing.