Risk Management & Organizational Reputation
Reputation & Recalls
Reputation is vital. It owns much of our lives: whom we associate with, where we live, and even what we buy. Almost 90% of consumers purchase with the company’s reputation in mind. The bottom line, public perception impacts corporate functionality.
Risk management expert Peter Sandman claims it’s a two-part problem. “How loved you are is virtually unrelated to how hated you are.” Reputation management then becomes a two-part challenge: organizations must continue to serve those who have a positive perception of the organization and mitigate hate from those who possess a negative view. A customer is 2-3 times more likely to write an angry review than a positive one, indicating that negative perception can linger much longer than positivity. Balance is key. Just because your customer loves your newest product does not mean frustrated customers’ issues have been solved.
For product manufacturers, recalls can be the biggest threat to reputation. Not only does this issue dole out a financial burden, but a company’s reputation begins a free fall. It sours the relationship you previously maintained with your positive customers and provides greater evidence for those who already disliked the organization. Industries where functional safety is a top priority, such as original equipment manufacturers, aerospace, automotive, or MedTech, can face even greater consequences.
Reputations take years to build and one incident to destroy. If you think your reputation is safe from years of trusted service or perhaps a dominant market share, you’ll want to reconsider.
Takata – Airbag Recall
Founded in 1933, Takata was a pioneer of textiles and automotive safety, erecting the first dynamic test facility to test its “seat belt protection system.” It quickly became a lead innovator in the automotive safety industry, beginning airbag development in 1976.
Within the next 20 years, Takata’s airbag design would dominate the competition, rewarding them with a 20% market share. It was right around that time they decided to cut costs.
Airbags are, in the simplest terms, a four-part system: crash sensor airbag control unit, inflator, and airbag. Upon impact the crash sensor sends a message to the airbag control unit which in turn prompts the inflator to undergo a chemical reaction, filling the airbag with air. To save time and money, Takata began using ammonium nitrate in their inflator reaction. Also used in demolition products, ammonium nitrate is highly unstable. When exposed to high humidity the burn rate of the chemical is vastly altered. Takata could’ve solved this issue within its inflator with the addition of a drying agent – it chose not to. In 2001, 50 million airbags were manufactured without a drying agent. Cars from Toyota, BMW, Audi, Honda, and Mitsubishi began driving off lots equipped with highly unstable Airbags.
Airbags in humid climates began misfiring, inflating in unnecessary incidents, or inflating at an intensity that caused metal shrapnel to explode into drivers’ faces.
By 2008 the injuries and deaths had mounted forcing the company to issue the first of many recalls. Takata paid $850 million to U.S. automakers for recall expenses and a crushing $1 billion to the U.S. Justice Department after pleading guilty to criminal charges.
In 2017, when The Harris Poll Reputation Organization surveyed the public’s opinion on the nation’s (America) most recognizable companies, Takata, a Japanese Company, was the household name that came last. Later that same year, unable to pay for recalls and criminal charges, the company sold to a rival organization for $1.6 billion in the U.S. For context, at its peak in 2007, the company’s market value was $3.6 billion U.S.
Each automotive manufacturer was responsible for recalling their vehicles, National Highway Traffic Safety Administration [NHTSA] cited that the organizations had the “ultimate reasonability” for the cost of replacing the deadly inflator. Automakers had simply purchased a product deemed standard in the industry, and now were collapsing under the weight of recall, replacement, and reputational damage. Takata’s name may have been the headline, but an automotive retailer’s name was never far behind. Takata’s filed for bankruptcy in 2017, their brand is now synonymous with death. A reputational cost was not worth the amount saved by cutting corners. As of 2018, Takata airbags have caused 24 deaths worldwide and at least 240 reported injuries. This recall is still described by the NHTSA as “the largest and most complex safety recall in U.S. history.”
Volkswagen – Keeping up with Requirements
In 2004, the United States Environmental Protection Agency (EPA) dramatically slashed the emissions it allowed cars to emit from their tailpipes by 94%. Automakers around the world struggled to produce fuel-efficient diesel vehicles for the US.
Seeing this vacuum, Volkswagen recognized a chance to dominate the US diesel-car market. If Volkswagen fabricated a car that could meet the EPA and its’ customer standards, it would have an easy road to conquest. The problem was, within the scope of their project, it wasn’t possible.
While developing the new diesel car, compliant with the new standards, a group of Volkswagen engineers cheated on emissions tests, later claiming they couldn’t find a technical solution within the company’s “time frame and budget.” The software was installed into the engines of 500,000 U.S. vehicles and 11 million vehicles worldwide.
Post-product launch, Volkswagen embarked on a multi-media campaign, pushing the eco-friendliness of its newest diesel vehicle. The marketing campaign was successful.
The launch marked a shift in Volkswagen’s branding and reputation; it was now an eco-friendly company, helping to save the planet. This new reputation did not last.
After noticing that Volkswagen’s diesel vehicles performed differently on the road than in the lab, European testers began to dig deeper. A portable emissions test illustrated the discrepancy between emission levels in the lab and emission levels on the roads. Volkswagen was soon reported to the authorities, inciting a scandal that would eradicate the company’s new eco-focused reputation.
Volkswagen’s CEO resigned, as the government demanded answers. Those who knew about or were responsible for the device’s installation have faced fines and prison time. After months of investigations and legal allegations from car owners, Volkswagen agreed to pay $14.7 billion to settle allegations of cheating emissions tests and deceptive advertising. By 2016 Volkswagen’s profit fell nearly 20% as car sales continued to suffer due to the scandal and its debilitating impact on its reputation. The company, as of 2020, has paid 31.3 billion euros in fines and settlements.
Through criminal charges, fines, and reputation, Volkswagen paid tremendously for its attempt to cheat environmental requirements. The company still promotes an eco-friendly brand, with attempts such as its carbon-efficient web browsing experience, but the effort seems hollow given the deceit they have already enacted.
MedTech – An Invasive Recall
A hip replacement surgery usually warrants a two-to-four-week recovery period, and once the incision is healed there are weeks of physical therapy. Rehabilitation is a long process, which can amount to nothing if the equipment begins to fail.
This is the reality that many had to deal with once DePuy Orthopaedics Inc. began a recall of its ASR hip replacement system. Years into the product’s launch, there were a distressing number of revision surgeries. Reports from doctors and complaints from patients suggested the product was not performing as intended. Not only were patients going through the initial pain of the replacement, but now they had additional surgeries as the implant began misfunctioning.
Pain is the first sign something is wrong with a hip implant. Swelling soon follows and then commonly metallosis – increased metal in the blood as the implant grind against itself other infusing toxins into the blood. The hip dislocates, dislodging with a popping sound right before the user is unable to walk. Individuals that undergo the procedure are doing so to remedy a persisting condition such as rheumatoid arthritis or septic arthritis. DePuy’s malfunctioning equipment left already at-risk patients immobile and enduring more rounds of surgery, therapy, and recovery.
In 2010 data began funneling in; patients who received DePuy hip implants needed replacements within five years of the initial surgery. The expected lifespan for a hip implant is 15 years, far exceeding DePuy’s. The organization met the criticism with denial. It released a statement claiming that its’ ASR hip implants had a lower revision rate. That claim crumbled as media investigations and lawsuits mounted. Before the recall, the FDA received complaints from 300 recipients of the device, most of whom had to undergo additional extensive revision surgery.
To save their reputation, later that same year DePuy launched a recall stating that it would “cover reasonable and customary costs of monitoring and treatment for services, including revision surgeries, associated with the recall of ASR.” This claim also proved false. Media reports indicate that the company denied multiple claims for medical costs.
The legal battle exposed that DePuy knew about the malfunctioning equipment but failed to inform orthopedic surgeons for fear of reputational damages. Similar to Volkswagen, documents released during DePuy’s investigation suggest the company predicted revision surgery would be necessary for its ASR hip replacement system within five years of installation. Johnson & Johnson, DePuy’s parent company, also knew about the faulty design but decided to keep it on the market.
The soft recall and attempts to cover medical costs did nothing to de-escalate the crisis. The company pulled its metal-on-metal hip replacements from the market and had to pay $4 billion in settlements to roughly 8,000 ASR hip lawsuits. Orthopedic surgeons and patients still avoid DePuy, associating the company with additional surgeries and debilitating pain.
The settlements enacted a heavy financial toll on DePuy – their reputational damage paralleled this loss. DePuy’s brand became linked to peril, a devasting reputation for a MedTech company.
Still entangled with this recall, DePuy faces more than 1,700 lawsuits over its ASR hips in Ohio federal court.
Corporate reputation is an organization’s most valuable intangible asset, but it’s only as good as your last mistake. The margin of error and confidence in your organization are synergic. An organization’s competitive advantage is interconnected to its marketability.
So, the question then becomes how do you limit mistakes?
Although the examples within this article resulted from unethical executive decisions, those decisions were influenced by time, budget, and scope constraints. Takata wanted a cheaper solution, Volkswagen’s engineers couldn’t achieve technical success in the critical timeline, and DePuy designed a product that could not hold up to the test of time.
Is the solution more money and more time? Absolutely not. Those are finite resources; no company has an unlimited quantity – designing successfully within project timelines and budget is central to innovation. No project will ever be without these limitations, and engineers must design complex, safe, and successful systems despite these impositions.
Finding and using the tools that take the unneeded strain off your design team is essential to maximizing your finite resources. The design process is old. Cut the clutter and optimize your resources.
We aim to be a part of that solution. Beginning the design process with robust and well-written requirements depicts a realistic project scope, the resources needed, and the technology’s feasibility. Precise requirements allow executives and engineers to solve the problem, not a miss-described issue.
Where innovation and honesty flourish, so too does reputation.
Instead of cutting corners or ignoring mistakes, provide your team with the support and tools they need to meet the project’s intent – working smarter, not harder, will garner more favorable results while reducing resources.