Product recalls involving Lime scooters and Boeing 737 Max airplanes are only two examples of recent high profile product recalls.
These are very challenging crises to manage, and companies need to be aware of the potential consequences of a poor response.
What is at stake is consumer trust in the company, something difficult to gain but easy to lose.
Unfortunately, when companies are dealing with defective products they sometimes forget that the safety of consumers is the top priority.
Instead, they focus on how to minimise financial damage in the short term.
This misplaced focus causes great harm in the long term through the loss of consumer trust.
As a result, it becomes more challenging for companies to convince consumers to give them a second chance.
There are two types of product recalls, voluntary and compulsory, and the majority of recalls are voluntary.
However, according to Trading Standards Senior Product Safety Analyst Brendon Noonan from MBIE, the Minister of Commerce and Consumer Affairs can also issue a compulsory recall order under section 32 of the Fair Trading Act 1986.
Crisis management: Beware of judging in uncertain times
A compulsory recall order takes place if businesses do not take satisfactory action to mitigate the risks posed by unsafe products.
Waiting for a compulsory product recall instead of conducting a voluntary product recall can cause considerable damage to a company.
This occurs because the public perceives the government's need to intervene as a failure by the company to safeguard the public's wellbeing.
A proactive approach by the company through a voluntary recall is a much better way to manage the crisis, and minimise the reputational damage to a company.
Brendon Noonan from MBIE also highlighted other types of mistakes companies make related to a product recall.
The first relates to underestimating the risk associated with products.
For example, prescriptions drugs may have unanticipated side effects which were not properly identified prior to introducing the product into the market.
The second mistake companies make relates to inadequately publicising a product recall. Downplaying a product recall will not protect a company's reputation.
On the contrary, this will increase the likelihood that consumers will become injured, which will generate even more negative publicity for a company.
Companies should reach out to consumers that are adversely impacted by the defective product, and work diligently to publicise a product recall.
The third mistake involves inadequate resourcing for the recall effort.
For example, has the company hired enough people to answer calls requesting information about the product recall?
Are there enough convenient locations to drop off the defective product?
The goal of a company is to maximise compliance with a product recall request, and inadequate resourcing will reduce the number of people complying with the product recall. This will increase the likelihood of consumer injuries.
The fourth mistake involves the selection of a company's suppliers. Has enough due diligence been conducted?
In many cases issues can be uncovered during the due diligence process which would prevent a product harm crisis from happening in the first place.
For example, has the company searched media reports to see whether product recalls involving other companies are linked to the supplier?
This type of information is publically available, and is not difficult to obtain. If the supplier is linked to product recalls at other companies, the company should reconsider its relationship with the supplier.
Finally, the last mistake involves multinational corporations operating in multiple overseas markets.
Is the multinational corporation addressing the product recall similarly in all of its overseas markets?
In other words, a multinational corporation should handle a product recall in the United States no differently than it handles the situation in New Zealand.
Consumers in New Zealand should receive equal protection from defective products from the multinational corporation.
A multinational corporation should not give preferential treatment to consumers in a more lucrative market, and it should treat all of its consumers in an equitable manner.
In addition to avoiding these mistakes, it is important for companies to communicate to its stakeholders what happened, and how it is addressing the issue.
For example, if the issue involves a supplier, it is important to mention this to the public.
When Dell recalled its laptop computers a couple of years ago, it emphasised that the recall was caused by problems associated with lithium batteries manufactured by Sony.
By highlighting the role of its supplier, Dell reduces the negative reaction of consumers towards the company resulting from the product recall.
Defective products are common occurrences that can turn into crises for companies. It is important for companies to understand that a poor response to a crisis can make the situation much worse.
Boeing's crisis involving the 737 max is an excellent example.
The delay in launching a product recall by the company has caused considerable damage to the company's reputation.
Avoiding these types of mistakes can help a company minimise the damage to consumer trust from a product recall.
- Daniel Laufer is an Associate Professor of Marketing at Victoria University of Wellington.