New research identifies the consequences that actually motivate a company to change after product recalls.
Researcher Guiyang Xiong, associate professor of marketing at Syracuse University, and colleagues approach the question by thinking about companies as if they were little children.
“Say I’m in school and I hit one of my friends, and my parents tell me, ‘Don’t do it again,'” Xiong says. “After a month I might hit another kid, unless I get punished. In the same way, companies won’t learn from their mistakes unless they get punished, and punished in a way that they actually care about.”
As reported in the journal Production and Operations Management, the researchers turned to the topic of product recalls to identify several factors that bear upon whether a company will want to change, as well as measures a company can take to help prevent future incidents.
Recalls of products posing a safety hazard to the public can severely damage a company’s reputation and hurt its bottom line, so product-recalling firms should be strongly motivated to learn from prior crises. Yet, repeated recalls seem to indicate that this isn’t always the case.
Considering a sample of 276 product recalls in the consumer packaged-goods industry, the authors’ motivation-based model predicts that public firms, by default, do not invest in improvements after a recall. What pushes the companies toward change is a strong and public signal from investors in the form of stock market penalties, which indicate waning confidence and willingness to invest and can lead to higher borrowing costs and other impacts on the company’s performance. Thus, the more severe the penalty, the more motivated the firm should be.
This effect, however, is amplified or reduced by a variety of factors:
- Firms with a good reputation, for example, may anticipate being better protected from negative consequences, as consumers are less likely to change their perceptions, so the company’s motivation to change is lower.
- Recent recalls by competitors and a strong relationship with distributors have similar moderating effects.
- Analysts closely monitoring a company, on the other hand, provide increased motivation for change, as does having an independent board that pushes harder for the company to deal with investors’ lack of confidence.
Previous research found improvements to operations capabilities, such as logistics and production, to be critical in preventing future recalls. In addition, Xiong and his colleagues propose changes to post-recall companies’ marketing capability because, they argue, it influences all primary causes of product recalls, such as manufacturing errors, issues with product design, inadequate or badly designed warning labels, and insufficient governance of suppliers and distributors.
“Marketing is about understanding consumers,” Xiong says. “The more you learn about them, how they use the products, what kind of features they desire, the more you can focus on designing products that will be safe for them to use.”
These insights, Xiong hopes, will help investors, regulators, and consumer safety organizations create the right conditions for companies to learn, improve their products, and, ultimately, protect consumers.
Coauthors are from the University of Georgia and Georgia State University.
Source: Syracuse University