Companies are embroiled in crises with unprecedented frequency—both a troublesome and costly reality.
In headlines about the top 100 companies on the Forbes Global 2000 list, researchers at McKinsey found the word “crisis" 80 times more often in this decade than in the previous one. Companies shelled out some $60 billion to the United States government for regulatory infractions. That's over five times the annual payout in 2010.
The risk of consumer flight is also increasingly high. According to a recent PR News and Dataminr report, “A Survey of Real-Time Data Collection in a Crisis Situation," the issue is more critical today than it was 10 years ago. A disaffected customer can easily share his experience on social media, influencing others to abandon the brand.
It's therefore vital for companies to stay on top of the conversation and respond quickly. As a crisis unfolds, they need real-time data to contain and remedy any damage.
Insensitive ads and angry CEOs: The many types of crises
The Institute for Crisis Management tracked 801,620 crisis news stories in 2017. A quarter were related to mismanagement, while discrimination and white-collar crime also ranked high. The most crisis-prone industries included financial services, technology, and automotive.
In recent years, Pepsi and Uber experienced some of the most high-profile incidents.
Pepsi released a commercial featuring supermodel Kendall Jenner calming a protest between police and a crowd by handing a law enforcement officer a Pepsi. The ad was widely criticized for trivializing social movements and their importance in today's society. The ad was released on a Tuesday, and by Wednesday Pepsi had issued an apology, stating: "We did not intend to make light of any serious issue." The company pulled the ad at once and halted "any further rollout."
Uber became synonymous with crisis under the rocky leadership of its founder and ousted CEO, Travis Kalanick. In short order, Kalanick was caught on video losing his temper with a driver; a former employee accused a manager of sexual harassment; and news reports emerged of Uber's unrestrained workplace culture. The board replaced Kalanick with Dara Khosrowshahi, who promised to change the work environment at Uber.
Why are there more crises these days? Everything travels at lightning speed.
With smartphones on hand, anyone can film an incident and post it instantly; frustrated customers can vent and share damning videos on social media. On YouTube, viewers watch over 500 million hours of video a day; Snapchat users watch 10 billion videos each day. Twitter has 326 million monthly active users who send 6,000 tweets per second. It's too much for anyone to keep up with, which is why 61% of respondents in the PR News and Dataminr report say they rely on a tool to monitor their brand's social media presence.
The McKinsey researchers say that globalization, international supply chains, and complex products make problems more likely. Today's cars are programmed with millions of lines of computer code; high-tech products made in China pass through middlemen and different jurisdictions en route to the U.S. A lot can go wrong.
When a company slips up, the blows come quickly
Journalists uncover ancient misdeeds. Twitter vigilantes pile on criticism. Consumers delete your app. Competitors take advantage of the maelstrom. And consumers flee.
For instance, It was easy to protest Uber's bad behavior. Many people simply deleted the app and rode with a competitor. The hashtag #DeleteUber trended on Twitter. During Uber's disastrous 2017, Lyft doubled its rides and gained market share. It positioned itself as the plucky alternative to the sketchy behemoth.
Since companies spend so much money acquiring customers, reducing customer flight through crisis management carries real value, the PRNews and Dataminr report points out.
Reputational damage and shareholder value
When investors estimate a company's value, they're not just looking at profit and loss. Much of its worth is based on reputation, which is why a public relations crisis is so expensive. Companies lose an average of 5% in shareholder value in the year after a crisis, according to a 2018 Pentland Analytics study.
For the world's five most valuable brands, more than half of the market value is based on reputation, notes the Pentland study. Assets and brand value make up the rest. Apple, Amazon, Microsoft, Google, and Facebook have billions of dollars of value locked into their reputations. A crisis can diminish that intangible premium in minutes.
How a company weathers the storm is revealing: A strong executive response will reassure investors and raise its esteem in the public; a weak response will have investors second-guess the leadership. A crisis lays bare the inner workings of a company and, therefore, its real value.
The Pentland study found that both strong and weak responses to a crisis have a lasting impact on a company. If a company responds well to a crisis, its value increases by some 20%; if all goes badly, the value decreases by 30%. This has been amplified in the past 20 years. Regardless of the company's size, Pentland notes, “the post-crisis value impact in a social media world is double that of the pre-social media portfolio."
The bottom line
A smart response to a crisis can actually add value to a company.
The PR News and Dataminr report found that receiving information quickly, even 10-15 minutes faster, can be essential. Those extra minutes allow communications teams to act proactively and intelligently; it gives them time to look at incoming data, evaluate the problem, craft potential responses, and, ultimately, decide whether they're dealing with an isolated issue or a large-scale crisis.