Innovator Article

How Marketers Can Best Prepare for Black Swans

A spontaneous acceleration problem led Toyota to recall eight million cars globally and suspend sales of several models in November 2009 and in January. To make matters worse, in February Toyota suffered another blow when reports surfaced of faulty brakes on the Prius hybrid. The defects have battered the company’s reputation, resulting in huge losses and sinking consumer confidence.

Professor Prasad Naik and Assistant Professor Olivier Rubel have analyzed how companies and their marketing managers can prepare for a potential product harm crisis—and demonstrated that there is an optimal course of action for incorporating risk into the allocation of marketing resources.

“Product crises are rare, but when they happen they can be devastating to a firm’s brand equity,” explained Rubel. “These should be seen as ‘black swan’ scenarios—always expect the unexpected.”

Using empirical data, Naik and Rubel developed a dynamic model of sales growth that assumes a crisis will occur at random times in the future. Their findings complement theoretical models recommending the best advertising budget decisions that incorporate crisis planning.

“Some marketing scholars argue that companies should spend more money and build brand loyalty before any crisis occurs; this acts as a buffer to declining profits following a crisis,” said Naik. “Others argue that a portion of advertising budgets should be set aside in case a crisis does occur.”

Naik and Rubel’s research supports saving for the rainy day. Using the 2000 Ford Explorer rollover problem as an example, they show that Ford’s baseline sales dropped 65 percent immediately following the crisis, which cost the company $3.5 billion. Ad spend before the crisis was less effective in maintaining sales afterwards, when profits sank. Naik and Rubel said marketing managers and their companies are better served by spending less on building brand loyalty up front and maintaining a reserve for advertising during a post-crisis period. Further, ad spending after a crisis is more effective in building brand interest than before a crisis.

“Managers should set money aside from their marketing budgets to be accessed following a potential product crisis event,” explained Rubel “Think of it as insurance against the possible damage.”

In a March 8, Los Angeles Times article about Toyota’s spontaneous acceleration problems (“Toyota Attacks Claim of Defect Found in Electronics”), Rubel said Toyota’s should concentrate on winning back consumers’ trust. He added, “At this point in time [Toyota] does not want to be in a communications war,” warning that the back and forth in the media will further erode that trust.

Naik has presented their research at the Yale School of Management, University of Virginia’s Darden School of Business and UCLA’s Anderson School of Management.