Crisis

INTRODUCTION In the 1993 incident of syringes were found in the Diet Pepsi cans, it is clearly showed that the company had demonstrated an effective halting from the company’s openness with the media. While dealing and handling with the crisis, the PR team of Pepsi focused on both their internal and external publics. It is important for an organization to have a strong internal communication as these internal publics helps to convince the external publics of the organization.

The internal publics of Pepsi were consists of the employees of Pepsi like executives, managers, stakeholders, and anyone that has a say in the production of Pepsi’s products whereas the external publics consists of the whole American population, competitors, FDA and the media. Communications among the internal publics were strong among them and the company directed an immediate disclosure of all facts (Anton, 2011). Internal communications is important in an organization as it helps to build bridges among the employers and employees.

Besides it can also help them to deal better with their external public in whatever they are doing regardless of solving crisis or as a tool of communication with its public. Pepsi then targeted the external public differently and chose to focus on television as its media vehicle. Besides, they also took a firm stand and said no to product recall. Alpac Bottling Company, the local canning and distributor of Diet Pepsi was one of the external publics that were involved with the crisis and Pepsi let the company to explain to the media that product tampering was merely impossible.

Publics do not believe that the case is over and then a documentation video was released. Pepsi invited media to the production plant and film the process. This video then shows the process of the sodas and that the product was virtually tamper resistant. Other techniques used by the PR of Pepsi include 24 hours hotlines for consumers query and complaints, assigning a specialist to work with the FDA and the legal department were also involved during the communications process (Pepsi case, n. d. ).

Videotapes were then sent out as well as memos and the surveillance footage that reaffirmed the Pepsi‘s innocence. As the hoax of the syringe scare goes on, a third video news release was aired by Mr. Weatherup that shows a surveillance camera from a convince store showing a lady purchased the product, opened it and then placed a syringe without anyone noticing. Commissioner Kessler from FDA then help a press release on June 17, 1993 notifying the public that the allegations scare of syringe was false (Yaxaira, 2011).

Throughout the crisis, it is clearly showed that communications between Pepsi and both its internal and external publics was very effective as the PR department disclosed all information to everyone as it is needed. They also convinced the external publics that on the proceedings of their investigation on a daily basis to ensure the public that the problem is under control. In this case study of Pepsi Syringe scare, the communication flow of the organization can be related with Blake and Mouton’s Managerial Grid of the human resources approach.

In this approach, it maps out different leadership styles compared to other approaches as this model concerns about both people and production. There are five prototypical management styles subbed under this model which are impoverished management, country club management, authority-compliances, team-management and middle-of-the-road management. All these five management styles have to be balance in concerning about people and production.

Concern for people in this model simply relates to the degree where a leader considers the needs of employees and team members before deciding on how to accomplish a task (Blake & Mouton, n. d. ). This concern can be seen when the PR team of Pepsi decides on its strategies, tools and techniques in communicating with both internal and external public during the crisis period. The authorities also guide and brief their employees on how they should communicate effectively with the public and customers.

Besides, the PR team of Pepsi also assigned a specialist to work with the FDA and to keep the employees on track that what is happening throughout the period and ensure the public that the problem is under control. Concerns for production, defined to the degree which a leader emphasizes production effectiveness and efficiency when deciding how to best accomplish tasks (Blake & Mouton, n. d. ). This concern can be seen when Pepsi emphasize on the effectiveness and efficiency of their production of the product.

The authorities even invited media to film the production plant and produce a documentary video news release to ensure the external public that product tampering is virtually impossible in the production. Finally a surveillance video of a convince store proved that Pepsi is free from allegations. Both of the concerns in the model can conclude that team-based communication direction is effective in handling such situation. The communication in the organization on handling with the crisis of Syringe found in Diet Pepsi Cans in 1993 was effective in the internal public but was not that efficient towards the external publics.

The president of the organization along the management team explaining and updating the employees on everything that is happening and by ensuring to the employees that the corporate office does not think that the tampering is the happening at the plants and by confiding and trusting in the employees abilities increased the employee’s morale at a critical time during the crisis. Employees were treated with the highest consideration. Advisories were sent to bottlers and managers at least once daily but often several times per day to update the situation. This information was to be shared with employees and customers.

These actions not only displayed willingness to cooperate but also efforts by the company to give the public any and all information it needed at different stages of the crisis progression. The 1993 crisis of hypodermic syringes reported in Diet Pepsi had effective communication results stemming from the company’s openness with the media. In addition, other technique used by the crisis management team was included 24 hours hotlines for consumers query and complaints, assigning a specialist to work with the FDA and the legal department were also involved during the communications process (Pepsi case, n. . ) (Fearn-Banks, 1996). The communication effectiveness of the company was a success as the crisis lasted for nine days with the crisis communication team working 15-20 hours a day. The team’s efforts resulted in positive media coverage during and after the crisis, which in turn reflected positively for the companies involved. Furthermore, Pepsi distributed instructing information, helping the public to react to the situation, making it an excellent example of how to handle a crisis. ( Strurges, n. d. ).

The poor communication with the external public can see from the action they did to the public after the incident happened. The first complaint regarding syringe was announced on 10th June 1993 but the company did not took any action to that. Pepsi-Cola Co. said that they could not just tell the public about the incident without having substantial amount of evidence to enforce their claim. Pepsi invited media to capture the canning process then the public relation department demonstrating the bottling procedure.

The crisis management team then releases the video news release (VNR) through the media such as television to reach the public eye after a total of 55 complaints about the case in a week. The video shows that is impossible to interfere with the process of the product, the speed of the equipment, and the safety precautions to produce the product. The management team should show the public with this video once they receive the first complaint and not to deny that it is not possible to have a syringe in the can. This is to ensure that they can still gain trustworthy from their customers.

The vice president of product safety, Jim Stanley said that “Because you don’t have a lot of time to gather the facts, you’d better take advantage of the first few hours that you do have. If you waste those early hours in trying to deliberate on what you should do, you are going to miss an opportunity to solve a lot of issues that you could best solve immediately”. In this case, the company had applied the Likert’s System IV where decision-making is performed by every organizational member and goals are set by complete work groups (Rensis Likert, 1967).

It can see from the unity of the Pepsi-Cola Co. employees’ work together to overcome or helps to solve the crisis in a short period of time. The crisis communication team works 15-20 hours a day in order to manage and try to work out the solution. Besides, the Likert’s System IV also emphasize on control of the organization in every level where the Pepsi-Cola Co. practices it during the crisis. The crisis management team had meeting with the internal publics on the ways to communicate with the external public or the way to answer media questions.

The way that internal publics answer questions from the external public is very important because they are representing the company to voice out the answer. According to most of the report from the publics including medias, the Pepsi-Cola Co. had handled the crisis effectively and able to rebound and increased its sales after the crisis. However, the organization could handle the crisis more effectively and better. With a better and effective internal and external communication, it will help to reduce the damages strike to their company.

Pepsi-Cola Co had showed a video regarding of the canning process and let the public understand how hard it would be to get an object into one of their cans. The company also showed a video of a woman trying to stick a syringe in a Pepsi can at a supermarket. However, they did not release the video on the spot. Public do not believe it although the company state that there were no way to insert the syringe in the bottling process at the plant. This become serious when there were 50 cases reported the following week. This proved their communication to the external public was not effective enough to convince the public when the crisis occurred.

They should release the video once the crisis happened and not release after they found out the case become nationally. If they could release the video instantly once they found out they were innocent, the public no matter from internal or external will tend to believe it was a product tampering cases. They external public (consumer) will not under panic attack (worried about the syringe might bring AIDS or hepatitis which it usually related to it) and the media will report the incident and make a clear statement which the product is safe to drink to the audiences.

The surveillance camera which caught the women trying to put a syringe into the Pepsi can when the worker turn around sound more solid and easier to gain public convincing than the video which shot about the canning process. The organization can handle the situation differently in the other way was the CEO of the company should stepped out as the spoke person once the first two cases occurred. At first case occurred, the CEO and president of the Pepsi-Cola Co. was not the spokeperson who accepted the interviewed by the reporter.

The first spokeperson was the Alpac Bottling Company CEO. As Alpac should be responsible of the incident, due to the external public only knew little about Alpac, they will only pointed their finger to Pepsi-Cola Co. because they were the imminent owner of the bottling company. Therefore, to decrease the damages brought by the crisis, the Pepsi-Cola Co. CEO should appeared in the first place to clarify the crisis and try to gain back public trust. The words from the company’s CEO will be more credible, powerful and convincing.

The external communication (consumer, media, government, etc) is important to the company as the internal communication (employee, employers and managers) will also play a crucial role in the organization. For the external communication to the publics who involved, they will tend to believe the words from the leader who was ultimately responsible than a public relations practitioner. The media can get a clear statements, answers or announcements from the CEO directly. As for the internal communication, the CEO who involved themselves into the crisis will gain more trustworthy and support from the employees or subordinates.

Different company practices different approach and theory. As for the Pepsi-Cola Co. , it practiced human resources approach during the crisis. The human resources approach was widely adopted by organizations in the 1960s. This participative, team approach to management-employee relations recognized that employees can contribute both physical and mental labor (Berger, 2008). Human resource approach acknowledges contribution of classical and, especially, human relations approaches to organizing (Miller, 2009).

According to the human resources theorist, individual labor is an important ingredient to reach organization goal but also must consider individual feelings in the organization. Therefore, human resource approach is the mix of classical approach and human relations approach which emphasize on both meeting organization goal and individual feelings. In human resource approach, communication became multidirectional and more interactive compare to the other two approaches. Feedback was sought to enhance problem solving and stimulate idea sharing and innovation content was added to social and task information in communications (Berger, 2008).

Concepts of employee trust and commitment emerged as important issues, and organizations began to share communication decision-making among employees (Berger, 2008). There are two theories categories in this approach which are Blake and Mouton’s Managerial Grid that concentrates on how a manager can combine values of the human relations school and the classical school into a leadership style and Likert’s system IV that specify the details of the organizational form that will incorporate the ideals of the human resources movement (Miller, 2006).

In the crisis of syringe found in Diet Pepsi cans in 1993, the Pepsi-Cola Co. is using the human resource approach in their organizational communication. During the crisis time, they not only work to solve the crisis but they also treated the employees with utmost consideration. The public relations department contacted the management department on how to communicate with the employees regarding the crisis situation and how to answer questions from the public and the employees (Yaxiara, 2008).

All 400 field locations were aware at all times of what was going on in the company, what information is being reported, how the government was handling this matter, and how the company is responding to this matter (Yaxiara, 2008). They updating the employees regarding the situation by sending advisories to bottler and manager several time a day. When there is any update from the investigation, the president was also contacting the management department to share the latest information.

This show that the company was concerning on employees feelings, therefore had explaining and updating the employees on everything that is happening and by ensuring to the employees that the corporate office does not think that the tampering is happening at the plants and by confiding and trusting in the employees abilities increased the employee’s morale at a critical time during the crisis (Yaxiara, 2008). Besides, they giving all information and teach the employees to respond is to control the information that shared with the external public and able to meet the company goal which is solving the company crisis.

The communication of the organization toward external public is also applying the human resources approaches. The company public relations department convinced the external public of the investigation proceeding on a daily basis to ensure to the public that the problem is under control (Yaxiara, 2008) in order to calm the public feeling and control the external situation. We cannot deny that management must exercise control for organizations to succeed. Based on the crisis that faced by Pepsi during the year 1993, we can see that the internal publics were well-handled. The Pepsi-Cola Co. did a very good job with keeping employees up to date with new information about the crisis they faced. This consequently gave faith to the internal publics. The Pepsi CEO also fully utilised his power towards the external public. During the crisis, Pepsi CEO appeared on every major network to share the message that defect was practically impossible in their products. A management function aimed at achieving defined goals and usually have three components which included taking corrective action, setting standards and measuring actual performance.

The contribution of power is very important in order to exercise control towards management. The power of ideology and hegemony made the employees in the Pepsi-Cola Co. to think that the organization hierarchy is needed to be practiced by the company. The Pepsi-Cola Co. created an ideology to the internal publics that the crisis can never related to the company and keep the employees up to date. The public relations department got in touch with the management department on how to communicate with the employees about the crisis situation.

There are also discussion on the way to answer questions from the employees and the public. All 400 field locations were aware at all times of what was going on in the company, what information is being reported, how the government was handling this matter, and how the company is responding to this matter. Internally, Pepsi prevented organizational disorder by updating employees with daily advisories to over 400 facilities nationwide. By doing this, the frame of an idea will be built in the internal publics’ mind. This ideology made the internal publics tend to trust the company.

In order to convince the external public, the internal public must have faith in the company too. The leader applied the legitimate power in the communication process within the internal public. The crisis management team which leaded by Craig Weatherup, the president and CEO of Pepsi was in charge of the education of the senior management regarding how to answer the questions from the employees and public. The employees were educated by the senior management regarding how to answer the questions from the public. This shows that the company are practicing legitimate power which is the power was emerged from positions and titles.

The people on the higher hierarchy have the right to control the lower level. However, the communication can be in formal and informal way. It also can be written and spoken and including all the channels. However, the legitimate power wasn’t excluded. From here, we can see that the Blake and Mouton’s Managerial Grid of the human resources approach was applied in the internal communication of Pepsi-Cola Co. This approach assumes that leaders will be most effective when it concerns both concern for people and concern for production.

The way that Pepsi-Cola Co passed their messages was practicing classical approach which is based on the hierarchy level. The legitimate powers of the leaders successfully control the management and formed an effective communication. On the other hand, they pass the message by using both formal and informal way. This is basically practicing human relations approach. By combining these 2 approaches, Blake and Mouton’s Managerial Grid of the human resources approach was applied in order to control and the organization and way of communication.

Pepsi successfully overcame the crisis by using different communication techniques and management power to show the internal publics and external publics that this scare was not possible. The internal publics were considered as successful in working together. The company guaranteed the external publics that there company does not experience any problems in manufacturing their products. It is now one of the biggest manufacturers in the world. Pepsi is connected with 200 countries and profits of the organization continue to rise per annum. This incident has not been discussed for years.

Pepsi-Cola Co. will stay successful if they use the right communication way when facing problems. References Anton. (2011, May 8). Effective communication case study analysis: case 9-1 Pepsi Syringe. Retrieved November 6, 2011, from http://essays24. com/print/Effective-Communication-Case-Study-Analysis/48875. html Berger, B. K. (2008, November 17). Employee/Organizational Communications. Retrieved November 5, 2011, from Institute for Public Relations website: http://www. instituteforpr. org/topics/ employee-organizational- communications/ Blake, R. , & Mouton, J. 2010, May 19). What is Blake & Mouton’s managerial grid? Retrieved from http://www. businessmate. org/Article. php? ArtikelId=188 Crisis management/Pepsi syringe scare. (n. d. ). Retrieved November 6, 2011, from http://iml. jou. ufl. edu/projects/Spring01/Morrison/Pepsi. html . (n. d. ). Retrieved November 3, 2011, from http://www. personal. psu. edu/bms5263/Pepsi%20case%20study%20marketing%20310. docx Yaxaira. (2008, February 9). The Diet-Pepsi crisis. Retrieved November 6, 2011, from http://newsflavor. com/alternative/the-diet-pepsi-crisis/

Schools across the nation often have to contend with a lack of adequate funds. As a result, school district administrators have had to find creative ways to obtain additional revenue. Some schools have allowed corporate sponsors to provide money and/or equipment in exchange for advertising on school grounds. Proponents of such plans assert that schools desperately need the funding/equipment and that students benefit from such corporate sponsorships.

Opponents argue that these arrangements allow corporations to treat school children as potential consumers, not learners, and that schools should be safe from commercial pressure. Schools across the nation often have to contend with a lack of adequate funds. As a result, school district administrators have had to find creative ways to obtain additional revenue. Some schools have allowed corporate sponsors to provide money and/or equipment in exchange for advertising on school grounds. Proponents of such plans assert that schools desperately need the funding/equipment and that students benefit from such corporate sponsorships.

Opponents argue that these arrangements allow corporations to treat school children as potential consumers, not learners, and that schools should be safe from commercial pressure. Schools across the nation often have to contend with a lack of adequate funds. As a result, school district administrators have had to find creative ways to obtain additional revenue. Some schools have allowed corporate sponsors to provide money and/or equipment in exchange for advertising on school grounds. Proponents of such plans assert that schools should be safe from commercial pressure.

The 2008 recession in the wake of stock market crash in the United States placed the entire world in a state of financial crisis. The effect of globalisation is being felt in the United Kingdom as it lost about £155 billion from its wealthiest individuals. The recession almost halved the number of the billionaires in the country.

Many countries including United Kingdom witnessed huge job cuts with no clue on when things would return to normal. The effects were so rapid that the retail business in UK had to live with price reduction and job cuts, and had to plan their year ahead to make seasonal plans. All this happened in succession because the companies were unable to predict the buying power of consumers to streamline the supply-demand chain.

From the 3rd quarter of 2008, one could see some positive trend in the sales of many retail companies in the UK. The corporate social responsibility (CSR) practiced by many retail companies did not allow the economic crisis take the full advantage of pushing the economy from worse to a state of chaos.

The monetary excess in UK that lead to the housing boom and bust, and the global stock market crash in the USA are not something easy to overcome. However, as a developed country that pioneered in the field of corporate social responsible (CSR) activities, the UK had clearly kept its hopes of becoming a prospective economy in the years to come.

Thanks are due unto the British government for encouraging corporate social responsibility (CSR) among the industries and implementing it effectively. Moreover, CSR is in the blood of the UK business conglomerates as we trace back Sheffield Steel industry in 1900 that behaved responsibly.

These practices are carried forward and grown proportionately that stood the test of a global recession today. The CSR practices may not have totally reversed the situation in UK, but it stands as a shield to protect the values and ethics of business and brings a mutual understanding between stakeholders and the companies for a transparent dealing.

Statement of the Problem

The impact of economic crisis on the retail companies in UK is felt severely to the extent of shaking the corporate social responsible activities. But UK is a pioneer in implementing CSR in corporate companies effectively and proved that the companies that are seriously involved in CSR activities progress in the long run.

Research Questions

To meet the goals and purpose of this study, four research questions were explored:

• What is corporate social responsibility in the UK?
  What is the mechanism of retail industry?
  Does corporate social responsible (CSR) activities help retail industries grow in the UK?
  What is the impact of the current economic crisis on corporate social responsibility in UK retail industries?
  What does the relationship between CSR and retail industries in UK imply to the other countries that are in the process of developing corporate social activities as part of their business development.

Significance of the Study

This research paper gives basics information about how corporate social responsible activities are viewed in developed countries like United Kingdom and its stance during the time of acute recession like the one witnessed presently. The impact on CSR is severe on the one side but the CSR has its own values in retaining its position in UK.

Definition of Terms

1. Recession –  A period of economic decline; a decline in GDP for two or more consecutive quarters.
2. Retail – Retail is the sale of goods to end users or consumers for consumption.
3. Stakeholder – A person who has direct or indirect stake in an organization because it can affect or be affected by the organisation’s actions, objectives, and policies.

Review of the Literature

The economic recession of 2008 is the worst of its kind in the history of UK after 1930. Taylor (2009) was calling for a similar probe such as 9/11 type on the financial crisis in USA. According to him, the United States government’s actions are also responsible for the present crisis throughout the world including UK. The US government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky sub-prime mortgages.

The growing global recession in April 2008 sent a shock wave by hitting the country very hard by wiping off £51 billion from UK’s top companies (Telegraph.Co UK 2009). This is one of the worst fall since Black Wednesday in 1992. All retail industries including the top 100 companies fell by nearly 20 per cent since June 2007.

According to the latest figures, about 9.5 million adults were finding their debt unmanageable in UK. About 1.4 million people will have to pay an extra 150 to 250 pounds a month for their housing loans. When the UK retail market is likely to touch 312 billion pounds (15%) in the next five years, the challenging time is ahead for the UK retail market with the slowing down of an annual growth. Companies that fail to compete with shrinking margins suffer (Prospects 2009).

The UK has not suffered so much earlier like now. However, since 1960, it has experienced rising outputs followed by very low or no growth and severe unemployment. Generally, these periods are called recession.

The present unemployment levels can be predicted from the works of Newman & Cullen. According to them, the unemployment level reached over 3 million people (over 11% of the workforce) at the worst points of the cycle in 1986 and in 1993. This high level of unemployment reflected the low point of another very long term, 50 to 60 year cycle. Supposing that UK is now on the upswing of this very long term cycle, unemployment during the low points of short-term business cycles should be much lower in the first decades of 2000 (Newman & Cullen 2002: 81). This is more or less true if we consider that the global recession had not occurred.

Retailing consists of the sale of goods on merchandise from a fixed location such as a department store, or kiosk, or by post, in small. Retailing contributes to 9% of the UK’s employment and output. Retailing in UK goes beyond businesses that the government officially classifies as retailers. Retail industry is viewed as an important social institution because about 30% of what people spend to retailers in the form of products and services they buy from retailers (Newman & Cullen 2002: 6).

“Retailing is the set of activities that markets products or services to final consumers for their own personal or household use. It does this by organising their availability on a relatively large scale and supplying them to consumers on a relatively small scale”. But when the consumer spending slows down because of debts, rising interest rates, inflation, house prices and job security, the retail industry loses its customers. Because of thousands of job cuts in all sectors of UK economy since October 2007, the consumers have lost the buying power.

If people are optimistic about their situation, they will spend more. As a result, the demand becomes greater than supply and businesses take off well expanding their operations. Conversely, when demand is less than supply, retailers experience a fall in sales.

The recession in the UK is a big challenge for the retail industry and an acid test for activities relating to corporate social responsibilities. Successful companies need a healthy society and a healthy society creates demand for business, as human needs are met and aspirations grow.

Corporate social responsibility (CSR) is not new to UK as it has been in practice for well over 200 years. The UK government is playing a key role in globalising CSR. Many companies in UK have agreed that doing good to the society is doing good for business as well. This sums up what CSR is in a nut shell.

However, between 1780 and 1833, the altruistic corporate social responsibility (CSR) was in practice in the UK. Employees are ‘human assets’ so they should be treated responsibly to receive the best performance from them. The CSR has been practiced proactively by many companies in UK. For example, the Sheffield Steel Makers practiced CSR honestly since 1900s. The UK National Insurance act of 1911 was the first of its kind in the world to press for contributions for unemployment and sickness benefits of all the staff working in companies.

Corporate social responsible (CSR) activities in the UK has a special meaning: it deals with environment and preserves social values besides making profit. Elkington argues that the social responsibility of the business entity is threefold: to create economic value by being profitable, to create ecological value, which is to engage in activities that are beneficial to the natural environment; and to create a social value, which is to engage in activities that are beneficial to life and the community.

The shades of meaning for CSR differ in different countries depending upon their growth and economy but Britain sees CSR as an inevitable part of the country’s growth. According to Carroll and Buchholtz (2003) CSR is fourfold: economic responsibilities, legal responsibilities, ethical responsibilities and philanthropic responsibilities.

Some British companies proved to be socially responsible even at times when CSR meant nothing to anyone. The UK contributed fairly to CSR and so it is acknowledged as a leader in the field.

The impact of the economic crisis in many countries was a slowdown in consumer activities because of unemployment, lower salary rate, etc. After the 1960s recession, this is considered to be the worst recession in the history of UK calling for strengthening of corporate social responsible activities (CSR).

The demand for CSR activities from the government and public on corporate in developed countries are on the high. For example, the stakeholders increasing request for information from companies on their CSR activities appear to be the main driving force behind the issuing of CSR reports by UK companies.

The strength of CSR is known only during the time of economic crisis like this. Ultimately, the corporate social responsibilities exist and continue despite the economic crisis. The retail companies are trying their best to stick to CSR activities to reap long-term benefits. Where there is no possibility of carrying out any corporate social activity due to severe losses in small companies, they are allowed to deviate temporarily from CSR activities to come back strongly later after recovery.

The high unemployment and the social unrest of the 1980s urged for the present explicit model of CSR. The governance crisis led to the trigger of new businesses in the community.

Michael Heseltine in his address in the Institute of Directors Secretary of State for the environment mentioned “We (government) do not have the money.  We do not have the expertise. We need the private sector again to play a role which, in Britain, it played more conspicuously a century ago than it does now.

According to Moon (2002), this had an appeal on the corporate companies and increased the government regulations and the stakeholder demands resulting in strengthening of CSR from community involvement to concern for socially responsible products and processes.  As the global business in CSR has grown, the British CSR now acquired wider global application.

With the growing current economic crisis, many corporations would be thinking of whether to be involved so much in corporate social responsibility (CSR). Because, they would be worried about unnecessary expenditures, that might eat into the profit margin to a great extent. This is likely to prevail for some years. Many corporations immediately look at the expenses incurred on CSR when it comes to economic recession.  It is not a wise idea if they want to sustain in the market for a long time. In case of smaller companies with dwindled revenue, the companies can temporarily cease from CSR activities and resume CSR activities once they are back in track.

Corporate responsibility is not simply giving money to charities or spending time with employees for developing their skills.  It goes a step further to consider corporate as citizens of society. It is a citizen responsible and accountable to all of its stakeholders, neighbors and all others in society at the same time.

TESCO, the largest retailer in UK is a fine example of retail companies that has a good record in maintaining corporate social responsible activities consistently.

Its profit rose to 2.8 billion pounds with a 11.8% rise in annual profits for 2007. Its partnership relation with trade union represents its serious involvement in CSR activities. TESCO’s CSR responsibility was reviewed in 2001-2002. As a result, its emphasis was on external CSR activities – environmental and social performance.

As a major food retailer, TESCO, created health and safety measures, employment initiatives for unemployed, and a workplace forum for the discussion of store issues of concern to staff. TESCO has a unique place in the list of retailers that play a key role in CSR activities.

Truly speaking, the cause of the current global financial crisis could have been avoided if socially responsible practices had been in practice perfectly. Companies have to be watchful in their next moves if they planned to cut down on CSR because they might have short term gains by throwing away CSR practices. Many enterprises nowadays accept that philanthropy is often expected by local communities and shareholders alike, and sometimes endorsed by consumers in the form of greater approval for, and loyally to, forms that go in for it.  In the UK retail sector, market research confirms the commercial benefits of a caring a public image.

The social responsibility of another retail industry Corus is mainly concerned with the environmental issues, such as decommissioning of Corus sites affected by restructuring. It also covers educational projects, such as producing curriculum support materials in schools. It also deals with employee issues, with the focus on health and safety of its workforce.

However, the economic downturn pushed Corus in Dec 2006 to discuss with UK Trade Unions on a pay cut for employees to manage the crisis (Corus discussions with UK Unions on economic downturn 2008). After its restructuring, Corus doubled its profit. Now the pre-tax profits at the firm surged to 435m for the first six months of the year, compared to 156 at the same time last year (BBC News, 2009).

Where it becomes impossible to maintain the corporate social responsible activities at the cost of closing down units, the company restructures its policies and minimises its CSR activities until it recovers.

How BP failed at crisis communication British Petroleum (BP) suffered a large-scale public relations and crisis communication disaster, when an oil-drilling rig accident on 20th April 2010 incurred a spillage of several million gallons of crude oil into the Gulf of Mexico. This catastrophic spill has been regarded as one of the most severe environmental damages recorded in the U. S. history, causing public animosity and frustration, substantially because of inappropriate BP? s crisis communication plan (Tangley, 2010).

The oil spill contaminated local environment and coastline of U. S. states Louisiana and Mississippi. Consequences were severe as the spill crippled heretofore developed Gulf Coast fishing industry for a couple of years. On international scene, it has led to a continued discussion on the safety measures of offshore drilling (Tangley, 2010). On the top of that, BP has been forced to continuously invest into improving of their image in media and on social networking sites, trying to eliminate as much negative PR campaign as they possibly could (McClam, & Weber, 2010).

BP reacted promptly in their statements, however, without emphasizing the compassion for those who were harmed and by appearing to be insufficiently determined to clean up the environmental disaster. The company should not have been over-optimistic about the scale of the oil spill. On the other hand, BP should have stepped up their social networking communication and assessment of the right spokesperson to a unique situation. Although that crisis scenario is a unique event that is hard to predict, it is definitely not unexpected, considering what business BP operates in.

By the year of 2015, 83 percent of companies will face a crisis that will negatively impact their share price by 20 to 30 percent, according to Oxford-Metrica study. This is more likely to happen to oil producing companies, as they are considered to be operating in a one of the most dangerous industries. Facing such a deep company crisis is not only about ways of how to minimize negative exposure in the press; however, it is also about reducing the environmental damage in the first place.

Company has to confront the situation without any futile delays and send a clear message to the public in its determination to manage the situation as best as possible. Definitely not by holding out on facts and baffle general public, as BP did (Oxford Metrica, 2011). For example, the officers from BP said that the explosion of Deepwater Horizon drilling at Macondo oil field caused an oil spill of about 2. 7 million barrels. In contrary, the US government’s estimate of 4. 9 million barrels spilt into the sea almost doubles BP? s assumption (Oxford Metrica, 2011). There were several companies involved in the Deepwater Horizon accident.

The oil rig was not owned by BP, but a contracting company Transocean. The Macondo oil well was owned partially by BP (65%), Anadarko Petroleum (25%) and Mitsui (10%). The defect of a blowout preventer was supplied by Cameron International (Oxford Metrica, 2011). “Finally, just before the accident, Halliburton fitted the cement cap intended to seal the well. The number of players involved has given rise to shifting of blame” says the Oxford Metrica study. BP used this opportunity and tried to avoid the spotlight by accusing their contractors and suppliers of being responsible for a Deepwater Horizon accident.

George Santayana, a Spanish philosopher, said “Those who cannot remember the past are condemned to repeat it. ” BP? s failure is a perfect example of this dateless quote. As the Exxon Valdez accident badly spoiled the view of general public on oil industry and this case has shown serious under reactions of both Exxon and American government, BP should have devised a risk mitigation plan with various safety features, assuring that similar ecological disaster of these proportions will not happen again.

Instead, the company has exchanged a following of a strict safety precautions and minimizing overall safety risk for being a risk-seeking company that is pushing to minimize costs and maximize profit. This accident has proven that the industry has lost a focus on prevention and their control mechanisms could not keep up with the newly acquired technologies in offshore exploration and production. Additionally, the company deliberately overlooked all warning signs that have been present.

This game was not worth it, as BP has taken a significant financial hit. Their stock price fell by more than 40% in one week after Deepwater Horizon explosion as it proves Figure 1 which compares a percentage change of stock prices of BP, Transocean, Cameron International and Halliburton early before and after the explosion of Deepwater Horizon. The peak loss of 46% in June 25 resulted into a $95 billion loss in market value capitalization of British Petroleum. Additionally, BP was forced to reserve $39. 9 billion in order to eliminate he consequences of oil spill; also pay $20 billion as a compensation for people directly affected by the spillage; $10. 8 billion as an expense for companies that capped and sealed the oil well and consequent cleaning operations and next $9. 1 billion on additional fees, penalties and fines (Oxford Metrica, 2011). This giving a total of $79. 8 billion entailed a significant decrease in net income for consequent 5 years to come. Figure 1: Comparison of stock prices of companies involved in Deepwater Horizon explosion [pic] Source: Oxford Metrica, 2011.

By going back to the PR campaign that has been launched straight after the oil spill, BP has done a very good job when they covered most of the negative publicity. BP? s webpage informed the general public about the will and devotion of the company and how hard they are trying to minimize the environmental damage or help the people affected; while not mentioning a word about the fact that BP takes responsibility for the disaster. Their Facebook account informed the subscribers how the company focuses on using the latest technology available in order to stop the spreading of oil spill.

To this moment, BP got a lot of things correctly. Nevertheless, it is not an immediate action which caused the negative exposure on media throughout the world. Tony Hayward, the CEO of BP, was actively engaged in the PR campaign, was ready to provide interviews to media and was willing to pay all the penalties and fines to the US government. However, Oxford Metrica review claims that “a string of clumsy comments and cultural misunderstandings, combined with a seeming inability to cap the well, dominated the media and, understandably, fear and anger took hold” (Oxford Metrica, 2011).

Despite the fact that BP is a huge global organization, we can observe that both of their public relations staff and higher management structures clearly did not handle the Deepwater Horizon disaster appropriately, at least from a public relations and goodwill point of view. Taken a closer look at what makes a global company with size of BP at least neutral in terms of a general audience perception, using common sense would inevitably lead unbiased observer to identify several key parts. Being as honest to public as possible, quick reaction time, correct usage of social networks and media exposure of the right representatives would most ikely be among them. However, BP undergoing their biggest crisis, not only from the technical point of view and the actual damage inflicted on the environment, but mostly image-wise, failed significantly at reacting accordingly; given the fact that the BP case is publicly known as being the biggest PR failure of the recent history. As mentioned before, being sincere about the huge environment tragedy, that was caused by a company, even if indirectly, is something what public audience would certainly expect.

It is obviously a bad idea to try to make it appear less serious than the situation is in reality, especially when media around the world are posting photos and airing images of an oil rig in flames and spilling thousands of gallons of oil into its surroundings. Mr. Thoma J. Roach, journalist from the magazine Rock Products has made a very good point on this matter, noting that BP`s CEO Tony Hayward reportedly said that the Gulf of Mexico is a big ocean and compared the amount of oil pouring into it as tiny and insignificant.

However, Roach claimed that such a statement is dismissive and that it pictures environmentalists and all the people in those industries devastated by the disaster as crybabies. Moreover, instead of placating them, it challenged them to come back strengthened with better evidence, more arguments and intensity. He also concluded that such a public relations strategy is only baiting the enemies (Roach, 2010). In simplicity, if Hayward would say something more sincere and actually true, BP could have looked better and avoided more negative publicity not only for the disaster itself, but also for their way of handling it.

Even though delivering the information is the most important part of the whole public relations process, one may argue that delivering it too late or in a bad form is as much important. Frederick E. Allen, former CEO of Jacobs Suchard, has made a good point on this matter using the BP? s public relations blunders as an example, mentioning that he would expect hundreds of press release updates from BP Global on Facebook, however during the tough times, BP`s PR section has issued only about hundred of them. On top of that, only few of them had something to do with the spill and its aftermath (Allen, 2012).

To improve this part of the strategy, BP clearly needed to utilize all of their resources, including their own web page, to its fullest potential and in appropriate time. What BP shown during their crisis and also afterwards, was clearly a lack of competent people responsible for writing short memos and messages on one of their main communication channels – their website. On the other hand, even when the PR department is doing a tremendous job on social networks, it does not necessarily mean that it will have actual impact.

This is caused by the way how social networks are used by the audience. Basically, company needs a massive amount of followers on given social network prior to the actual case, so they can immediately use it to reach their target audience with tweets or updates. So despite BP had a capable social network manager who succeeded in posting a lot of material, they did not really matter too much as BP lacked followers, as their staff weren’t active on this matter before it became a really needed tool in times of crisis (Allen, 2012).

As mentioned earlier, significant blunder of the company in PR area was a wrong choice of a spokesperson. A lot of critique went on Mr. Hayward`s head. Thomas Roach has described BP`s CEO as blunt-speaking, hard-edged and criticized BP for using him also as a chief spokersperson for the company, mentioning that American industry already learned a lesson from Japanese competitors in the 1980s, specifically, that the person who is the best engineer does not necessarily make the best manager.

Tony Hayward was thus a bad hire for BP, as he was not a outstanding leader with appropriate communication skills (Roach, 2010). Maybe BP wanted to look like they stood behind their CEO, thus even after his publicly known and very unfortunate quotes, they did not want to take him down and replace him by someone with better set of communication skills. However, Mr. Hayward has most likely done more damage with his inappropriate appearances than it helped BP to look like they are maintaining their integrity.

Despite the immediate PR reaction after April 2010, the company seemed to be unable to appreciate the cultural context, since BP did not speak the language which the American public wanted to hear. BP did not appreciate the political context as well and at that time, they heavily damaged the lingering relationship with US government as exclusive emitter of oil-drilling permits for locations rich on oil. To conclude the case, it can be claimed that BP has run their technical operations during the crisis bad, but their immediate PR reaction was even worse.

Moreover, BP? s public relations department was over-optimistic and endlessly reassured the general public by optimistic assessments that the amount of spillage is “relatively tiny” and the situation will be dealt with soon (Roach, 2010). Additionally, the company should have been more compassionate to the victims of the oil rig explosion and to those who were harmed by the latter oil spill. However, this case can be seen as a valuable lesson for not only petrochemical industry, but the whole multinational companies segment of the businesses around the world.

Lessons that BP did not learn from the Exxon Valdez case years ago will hopefully be learned by other companies from BP`s case. On the other hand, this environmental disaster has happened during the Information era, when everything is immediately spread worldwide and when one has to respond to the audience as quickly as humanly possible. Thus, it cannot be isolated in a time period of a year 2010, but it must be viewed as a continuous process. Even after all cleaning work will be done, there still will be a future aspect of the case, as general public will keep demanding a preemptive measures by BP.

This will create another playfield where BP can work on their public relations and slowly present itself as they have learned their lessons and from now on, BP will become a whole new company with a new approach to safety and crisis management. This actually seems to be the case, as articles in 2011 and further does not generally mention BP in such a bad light as they were doing previously, which can be accounted to applying new PR strategies.

Specifically, we can see a good presentation of BP in a NY Times article from the middle of 2011 written by Julia Werdigier, author of more than a thousand articles for NY Times. In the article, BP is given a credit for announcing the new, safer, deep-water drilling standards of BP together with a more general safety measures (Werdigier, 2011). With articles like this, BP is starting to turn their image around. But in the end, only time will reveal if the PR department of one of the biggest multinational companies will learn their lesson.

References Allen, F. (2012). The Gulf Spill: BP Still Doesn’t Get It. Retrieved October 22, 2012, from http://www. forbes. com/sites/frederickallen/2012/04/20/the-gulf-spill-bp-still-doesnt-get-it/ McClam, E. , & Weber H. R. (2010). BP’s failures made worse by PR mistakes. Retreived October 30, 2012 from website http://www. msnbc. msn. com/id/37647218/ns/business-world_business/t/bps-failures-made-worse-pr-mistakes/ Oxford Metrica. (2011). Reputation Review 2011 [Report]. Retrieved from October 30, 2012, from website: http://www. oxfordmetrica. om/public/CMS/Files/825/Aon_Oxford% 20Metrica%20Reputation%20Review_2011. pdf Roach, T. (2010). BP’s PR Lessons. Retrieved October 22, 2012, from http://www. rockproducts. com/index. php/key-issues/community-relations/9719-bps-pr-lessons. html Tangley, L. (2010). Bird Habibats Threatened by Oil Spill. Retrieved October 26, 2012, from website: http://www. nwf. org/News-and Magazines/NationalWildlife/Birds/ Archives/2010/Oil-Spill-Birds. aspx Werdigier, J. (2011). BP to Tighten Deep-Sea Drilling Practices as It Tries to Rebound. Retrieved October 23 from LexisNexis Academic database.

Halmstad University School of Business and Engineering Master in Management of Innovation and Business Development Toyota Crisis: Management Ignorance? – A Swedish Case of Consumers Perceptions Master’s Dissertation in Management of Innovation and Business Development, 15 ECTS Final seminar 2010-05-27 Authors: Yuanyuan Feng Supervisor: Mike Danilovic Hamlstad University Feng(2010) TOYOTA CRISIS: MANAGEMENT IGNORANCE? – A SWEDISH CASE OF CONSUMERS PERCEPTIONS Yuanyuan Feng School of Business and Engineering, Halmstad University, Sweden Abstract

Since the late 2009, the famous vehicle manufacture Toyota has suffered a severe crisis due to unintended quality problems in its cars which had triggered Toyota’s largest officially recalls of its cars around the world. This crisis threatens the company’s previous reputation of good quality cars, as well as the brand image built up over time. This study aims to elaborate on the Toyota crisis in order to understand why Toyota faces this crisis and how they deal with the crisis; and investigate consumers’ perceptions of Toyota brand as the outcome of the crisis, with a focus on Swedish market.

A qualitative research along with a number of face-to-face interviews with Toyota Swedish dealer and Swedish vehicle consumers is conducted. The findings reveal that the impact of the Toyota crisis in Sweden is not as serious as that in America; there remain satisfied and loyal Toyota’s customers who are not swayed by the negative publicities; While Toyota should manage the crisis even in a better way in order to retain its good reputation. Crisis, Toyota, Corporate Reputation, crisis management, consumer perception Key Words INTRODUCTION We deeply regret the inconvenience and concern caused to our customers and others by our recent recalls of multiple vehicle models across multiple regions. ” – Aki Toyoda, the CEO of Toyota Motor Corporation1 (Toyota website). Since the above apologetic speech was addressed by Aki Toyoda at a press conference in February 2010, it had been highlighted at the front page of Toyota’s official website for a few months. Beside the regretful expression we can learn from this public release, it also implies that the Toyota, one of the world’s largest automakers, is suffering in their recent recalls of millions of vehicles round the globe.

Safety recalls are common issues occurring in automobile industry, few may have long run impact on the automakers involved if handled correctly. However, in this case, the disaster engulfing Toyota is of a different order (The Economist, Feb. 6, 2010). Toyota’s quality brand has been at a risk due to its sedans’ safety problems sequentially emerged recently. 1 Toyota Motor Corporation is the full name of the company, however, in this article the word “Toyota” will be used instead of Toyota Motor Corporation in order to make it short. Hamlstad University Feng(2010) In 2008 Toyota became the world’s largest carmaker when it successfully exceeded General Motors in sales and production. However, this leading position of Toyota had changed since the end of 2009. In United States, Toyota’s largest marketplace, a fatal crash of a Lexus ES 350 happening on August 28th 2009 was highly publicized, due to the gas pedal was stuck and the car was out of control (Los Angeles Times, Oct. 25, 2009).

Since then, Toyota’s vehicles have been largely exposed to a series of issues associated with unintended acceleration problems, which had triggered Toyota’s escalating crisis and its massive recalls of approximately 9 million vehicles globally within six months. For Toyota, this is indeed a tragedy not only related to heavy financial losses due to repairing costs, market share lost and production suspending, but also to Toyota’s reputation for matchless quality and management.

The firm’s reputation for quality cars, on which the business was built over time, is shattered. Problem Discussion Toyota has long been regarded as the pinnacle of Japanese innovation, manufacturing quality and industrial pioneer (The Economist, Feb 13, 2010). Its vehicles are well known for economy, reliability and fuel efficiency. Its ‘lean’ manufacturing techniques and culture of continuous improvement were the envy of the business world (ibid). It is absolutely astonishing that Toyota has been embroiled in such a serious quality issues with its vehicles.

Just within six months, almost 9 million cars have to be taken back for modification under the potential problems with floor mat, acceleration pedals, and braking, all of which were related to unintended acceleration problems by publics. As we know, cars nowadays have become more complicated in features and functionality. The growing numbers of wires, sensors and computer chips embedded in auto electronics have profoundly changed the automobile in the last decade (Krisher, 2010).

As more and more hi-tech systems are fitted to modern cars, it has become more and more perplexing in quality-control testing along with troublesome interferences and uncertainties. Any small electronic flaws randomly happened in the complicated machine, as well as the influence of environmental factors, can easily lead to a failure of a car. In the Toyota crisis, we would wonder if the massive recalls were simply as a result of mechanical problems that could happen in any automaker potentially, or were caused by other errors of the company that can be avoided in term of their technology and management.

No matter how, the recalls stories made the headlines worldwide. Especially in United State, Toyota has received unprecedented attentions from mass media, most of which have published a lot of negative news related to this issue, questioning to the quality problems of Toyota’s car and its reputation. Negative events usually come unexpectedly with the potential to bring an organization into reputational crises and thereby imperil its future profitability, growth, and survival (Greyser, 2009).

Whether the negative impacts are immediate or sustained over months and years, crises would probably affect both internal and external stakeholders of the company (Weiner, 2006). Suffering in such disaster, Toyota has taken action to manage the crisis, in order to retrieve their reputation and rebuild trust from stakeholders, especially the most important groups – consumers. Toyota has been in the hot center of coverage in United State, where the crisis is originally initiated. While, other countries involved in Toyota recall issues seem to pay less attention to this event than that of North America.

Since the recalls have been conducted across regions globally not only in North America, it would be interesting to see how vehicle consumers in non-American regions perceive the crisis and the Toyota brand. 2 Hamlstad University Feng(2010) Purpose and Research Questions With the above problems in mind, this study aims to elaborate on the Toyota crisis in order to understand why Toyota faces this crisis and how they deal with the crisis. This can be achieved through a detailed overview on what have happen in Toyota related to the crisis on a general level, as the recalls had been released globally.

Moreover, the purpose of this research is also to investigate consumers’ perceptions of Toyota brand as the outcome of the crisis. To be specific in this aspect, Swedish market will be the focus of the research where Swedish vehicle consumers are examined. Accordingly, the research questions can be set as following: What are the reasons that force Toyota coming to the troublesome crisis? How does Toyota handle this crisis in order to retrieve its reputation? What are the Swedish consumers’ perceptions of Toyota brand as the outcome of the crisis?

Although this research is inspired by an empirical case, the findings would also help to develop our understanding on how an organization can more effectively respond to crises, as well as building new knowledge to the area of corporate reputation and crisis management. It can also draw practical implication for crisis managers in auto motor and other industries. RESEARCH METHOD This study is done in a way of focusing on the Toyota case, it is therefore a case study that has an emphasis on empirical finding.

Through empirically studying the Toyota crisis, which typically represents organizational crisis, the intent of this research is to develop an understanding of organizational response to crises and brand images management in auto motor industry and other industries. An explorative research along with descriptive characteristic is thus employed, by raising open questions to illustrate the crisis phenomenon and try to explore relatively new knowledge for organizational crisis management. A qualitative strategy is selected for formulating questions, purpose and gathering data.

Characteristics of this approach are closeness to the respondents, to capture their values, attitudes and perceptions based on their own words and meanings (Bryman and Bell, 2007). According to the study purpose and the research questions placed above, this research is conducted from two perspectives: the Toyota itself on a general base and the vehicle consumers in a specific market. When formulating the purpose and research questions, here raise a problem with the selection of consumer respondents.

Although the Toyota crisis occurs on a global level, it is impossible to conduct the research targeting consumers in all the markets around the world. Furthermore, compared to the United States where triggered the crisis and dominantly receive extensive coverage negatively related to Toyota’s stumble, other countries and regions that are involved in the recalls are less focused and could present more pertinent opinions toward this issue. Consequently, in order to gain more reasonable insights, I would like to look into a specific market instead of American market.

Since I live in Halmstad city of Sweden, the sampling respondents – Toyota dealer and vehicle consumers – will be targeted within Halmstad city, for the purpose of convenient location to conduct the research. 3 Hamlstad University Feng(2010) In order to elaborate on the Toyota crisis, secondary data associating with Toyota crisis on global level is examined and collected initially through different sources, such as media coverage, official releases from government regulatory bodies, critics’ comments in journals, and Toyota official websites.

This is done to provide an overview on what exactly happen in Toyota connected to the crisis basically. In addition, to be more specific, primary data collection is considered significantly critical since it is a more exploratory-oriented study. In this research, face-to face interview manner, which is one of the most important sources for a case study (Yin, 1994), is employed to investigate the reflections toward this crisis both from Toyota’s dealer and vehicle consumers in Halmstad city.

Consequently, in Toyota dealer store which is named as Toyota Center in Halmstad, a face-to face Interview with the sales executive is conducted, lasting about 40 minutes by following a semi-structure interview guide (see Appendix I). On the other hand, the consumer respondents are randomly targeted by separating into two distinct groups: 1) Toyota customers, who own Toyota cars or have the intention to buy a Toyota car, are found when they are visiting in Toyota dealer store; 2) other consumers, who are using other rands’ car, are randomly selected in some gasoline stations or large parking places in Halmstad city. It might be interesting to make comparison between these two consumer groups for the possibility to draw valuable insights on consumers’ perception of Toyota brand and the crisis. As a result, total 21 consumer respondents are interviewed (9 Toyota consumers and 12 other brands’ consumers). The interviews with consumer respondents last with a range of time from 3 to 6 minutes respectively.

Although pre-designed interview guides are used as well (see Appendix II & III), questions for consumers are asked flexibly and may not follow on exactly in the way outlined on the schedule (Bryman and Bell, 2007). This is to allow the consumer interviewees to have a great deal of leeway in how to reply according to specific situations (ibid). Despite the collected numbers of consumer respondents are too small to cover the whole sampling population in terms of generalization, it’s important to note that this research is not aimed to simply generate a universalized outcome covering the whole Swedish vehicle consumers.

Instead, it intends to capture consumer respondents’ cognitive and affective values, attitude and perception, to explore new insights based on their own words. Their responses collected on a face-to-face interviews basis are therefore considered as valid and reliable to achieve this inclination, as well as to some extent standing for what the Swedish vehicle consumers really perceive toward the Toyota crisis. LITERATURE REVIEW When facing a crisis the former and present reputation of a firm would be shaken, and it might be twisted in something unfavorable for the organization.

How a firm communicatively responds to the crisis can influence its stakeholders’ perceptions of the corporate reputation, and in turn impact their future purchase intentions. In this part, theoretical literature regarding corporate brand and reputation, crisis management and consumer perception about the post-crisis outcomes are mainly reviewed in order to serve as pre-understanding knowledge for better analyzing the Toyota case later on. Corporate Branding and Reputation A brand can convey a numbers of facets, such as attributes, benefits, values, ulture, personality, and user identity (Kotler, 2003). Through a set of symbols and characteristics a brand convey, consumers 4 Hamlstad University Feng(2010) can easily identify what a brand stand for, what value it represents, how it differentiate from others. Corporate branding draws on the traditions of product branding with the same objective of creating differentiation and preference to customers, while it involves more complex activities at organizational level, and requires to manage interactions with multiple stakeholder audiences (Knox and Bickerton, 2003).

Branding on corporate agenda has been increasingly recognized as a strategic tool that leads to a dramatic extension of the applications and scope of branding (ibid). Urde (2003) emphasizes that the importance of core values created in corporate branding process, in which the core values are linked to organizational mission, vision, culture and organizational values, all of which affect the brand architecture, product attributes, brand positioning and communication strategy.

Consumers tend to identify with the personification of brands through the association of the companies or brands to traits such as values, characteristics, attitudes, and ideals. Therefore, to personify the corporate brand, the impressions that the communication creates must be consistent with the values that the company claims to stand for (Urde, 2003). In addition, Benefit associations provide a central reason for consumer’s choice of a specific brand over other in the category (Dawar and Lei, 2009).

To gain customer-based brand equity the consumers must be aware of, and familiar with, the value offering (brand awareness), and hold brand associations that are strong, favorable and unique in comparison with other brands offered in the same category (brand image) (Petruzzellis, 2010). Corporate reputation is the cornerstone in corporate branding. It is of significant importance to all organizations, regardless of being commercial, governmental, or not-for-profit organizations (Watson, 2007). Essentially, orporate reputation is an aggregate evaluation made by stakeholders of how well a company is meeting stakeholder’s expectations based on its past behaviors (Wartick, 1992). The value of a brand is determined by both its tangible and intangible assets, and brand image and reputation forms a critical part of the intangible assets (Wang, 2005). Fill (2006) suggests that reputations are developed over time from the image, and it is more embedded and stable; while image is more transient and can be instantaneous and reality superficial.

Watson (2007) argues that reputation does not occur by chance, it relates to leadership, management, and organizational operations, the quality of products and services, relationships with stakeholders, and communication activities and feedback mechanisms. A favorable corporate reputation can convince the undecided to choose a certain product or service and dissuade existing customers from moving to a competitor; whereas a damaged reputation can be irreparable and, in extreme cases, lead to a company’s downfall (O’Rourke, 2004).

Fombrun (1996) claims that in order to build a favorable reputation four attributes need to be developed: credibility, trustworthiness, reliability and responsibility. Everything an organization does, and does not do, has a direct impact on their reputation (Dolphin, 2004). Stakeholders will develop expectations as to how the firm will act in a given situation. When customer’s expectations are satisfied, they will feel safety, credibility, and security as perceived value in this relationship, which all together increase trust and then enhance customer’s loyalty (Ravald and Gronroos, 1996).

However, failure to meet those expectations may cause a negative reputational impact. Furthermore, despite firms have achieved overall and continued marketing success, it would appear that the reputation of corporate brands can be tarnished when facing crises (Fill, 2006). Therefore, reputation may offer both benefits and challenges to organizations. Nevertheless, the strength of the brand, as well as the management’s 5 Hamlstad University Feng(2010) flexibility and willingness to be open and transparent with questioning publics, can protect the organization’s reputation in the long run (ibid).

Crisis Management In such business environment the need of a robust, corporation-wide plan to deal with unexpected crises is required. Crisis management researches investigate the essences of organizational crises and how appropriate organizational response influences post-crisis outcomes for the entity involved (De Blasio and Veale, 2009). Through crisis management planning and implementation, organizations can be better prepared to deal with unforeseen events that may cause serious or irreparable damage (Zhao and Fan, 2007).

Threats of Crisis Crises are rare events that disrupt the normal operations of an organization, with knocks on the implications for its assets, its future relationships with a company’s stakeholders and which threaten the very survival of the organization (Carroll, 2009). Crises are seen as threats to the organizational reputation, and could harm an organization’s future profitability, growth and possibly its survival (Tucker and Melewar, 2005). The extent to which a crisis threaten corporate reputation is rather complex.

Some crises can be sudden and unexpected while others can be the result of problems that festered over time (Greyser, 2009). A business might face local citizens, competitors, industry commentators, statutory bodies, pressure groups, the media and academics as influencers of its reputation (Tucker and Melewar, 2005). Greyser (2009) proposes some typical sources of corporate brand crises, which are caused by: product failure, social responsibility gap, corporate misbehavior, poor business results, executive misbehavior, poor business results, loss of public support, and controversial ownership, etc.

Tucker and Melewar (2005) argue that news media and internet are certainly a substantial threat to any corporate reputation since the public are more sensitive to a corporate scandal. When a crisis emerges, a wide range of stakeholders are adversely affected by a crisis including community members, employees, customers, suppliers and stockholders (Coombs, 2007). Most stakeholders will learn about a crisis through news reports and online social media, therefore the news media and the internet play a critical role in affecting people’s perception in a crisis (ibid).

The headline-hungry media has vicarious appetite for obtaining newsworthy material. Their claims often go unchallenged if there is a possibility to create a sensational story (Tucker and Melewar, 2005). There is also the temptation for journalists to sensationalize any ‘corporate gossip’ which they might hear, in order to maximize their own revenues, especially in the powerful news (ibid). As a result, crises pose certain risks to an company – potentially affecting critical aspects like reputation, image, brand equity, credibility, publicity, financial viability, legitimacy, community standing, etc. Smudde, 2001). The more respected a firm’s reputation the more sensational a corporate scandal will be and so these firms are subjected to the most intense scrutiny (Tucker and Melewar, 2005). A corporate reputation needs to be stable and consistent, if it is to withstand the scrutiny of many factors influencing it (Greyser, 2009). If a reputation shift from favorable to unfavorable, stakeholders can change how they interact with a corporate, and they may even server 6 Hamlstad University Feng(2010) ties to the organization and/or spread negative word of mouth about the organization (Coombs, 2007).

Crisis Communication Strategies When facing a crisis, how the company handles the crisis and what the reputation of the company is viewed by stakeholders may imply whether the firm can survive/recover or not. It’s critical for organizations to recognize what is the issues generating the reputational threats, who is/are involved, and figure out what and how to respond the crisis (Greyser, 2009). In crisis management, corporate communication is widely acknowledged to play the key role in overcoming crises and repairing reputation.

Sturges et al. (1991) suggest that communication content as a component of crisis management must meet three needs depending on different objectives: 1) instructing information tells stakeholders how they should behave in a crisis context; 2) adjusting information allows affected stakeholders to cope with the emotional aspects of crisis; 3) internalizing information is absorbed by stakeholder members and forms the basis for long-term judgments about the organization’s image as it endures a crisis.

This is supported by Coombs (2007), who argues that since a crisis causes uncertainty and stress for the stakeholders, companies need to be more open with sincere information to their stakeholders in order to helps them cope with the psychological threat from the crisis; furthermore, stakeholder want to know what corrective actions are being taken to protect them from similar crises in the future and thereby reduce their psychological stress.

When examining the role of corporate communication in crisis situations, the theory of image restoration have become perhaps the most dominant paradigm in this field (Dardis and Haigh, 2009)). Based on image restoration theory, Benoit (1995, cited in Fortunato, 2008) identifies a typology of five main communication strategies that can be used to restore image and reputation in face of crises: (1) Denial strategy – the organization attempts to remove any connection between the organization and the crisis by claiming that there is no crisis and offers a simple denial that it did not perform the act in question. 2) Evasion of responsibility – the organization attempts to reduce responsibility for the crisis by claiming that it was either forced into the crisis by another culprit and its inability to prevent the crisis that causes a mistake, or there were good intentions in its act. (3) Reducing the offensiveness of the crisis – the organization attempts to minimize perceived damage caused by the crisis and reinforce the good traits of the organization by creating a more complete context with which the organization should be evaluated. 4) Corrective strategy – the organization implements steps to solve the problem and prevent a repeat of the crisis by taking corrective actions; (5) Mortification strategy – the organization takes full responsibility for the crisis and asks for forgiveness. Based on Benoit’s typology, Coombs (2007) characterizes crisis response strategies by their level of acceptance by critical stakeholders. He identifies a full apology as having very high acceptance, where the organization takes responsibility for the crisis and requests forgiveness from stakeholders.

There is also high acceptance for corrective action, where the organization conveys a notion that actions are being taken to prevent a recurrence of the crisis; while a denial strategy has no 7 Hamlstad University Feng(2010) acceptance even when the crisis occurred or attacking the accuser (Fortunato, 2008). However, in rumor and challenge crises, managers need to deny and argue that there is no ‘real’ crisis (Coombs, 2007).

To effectively implementing different kinds of response strategies, crisis management often has a strong focus on public relations to recover any damage to public image and assure stakeholders that recovery is on-going. Public relations is defined as the practice of managing communication between an organization and its publics (Huang, 2004). It enables the organization to expose themselves to stakeholders by using topics of public interest and news items.

It is usually conducted in communication activities including speaking at conferences, working with social media, interacting with stakeholders, etc. In public relations, researchers also argue the need to form en executive ‘crisis-handling team’ directing to crisis response. Because the crisis-handling team can provide access to detailed crisis plans, control knowledge in terms of tactics, empirically established relationships, propositional facts, and strategies for making use of factual and procedural knowledge (Nunamaker, Weber and Chen, 1989, cited in Hale, 1997).

In addition, the role of CEO is recognized to be important spokesman in crisis communication, as corporate reputation and CEO reputation are increasingly intertwined and the CEO is inevitably cast in the role of chief communicator (Watson, 2007). Therefore, what an organization says and does during/after a crisis can affect a variety of important crisis communication outcomes including the organizational reputation, anger, negative word-of-mouth, and account acceptance (Coombs and Holladay, 2009).

Choosing appropriate crisis communication responses mitigating negative consumers, public and stakeholders’ perceptions are critical to managing corporate reputation (De Blasio and Veale, 2009). Consumer Perception of the Post-Crisis Outcomes As mentioned above, how effectively a company deals with a crisis will influence the post-crisis outcomes related to its survival or recovery. The more acceptable the crisis communication strategies are to consumers, the less serious outcomes occur to the company.

In addition, the post-crisis outcomes perceived by consumers are also determined by other factors, such as consumer attribution of crisis responsibility, and company’s prior image and reputation, which will be discussed as follows: Crisis Seriousness and Crisis Responsibility According to Coombs and Holladay (2002), the evaluation of a crisis situation and its reputational threat to a company is largely a function of consumers’ attributions of crisis responsibility, which implies how much consumers believe organizational actions caused the crisis, and whether the crisis was accidental (e. . , technical error) or intentional actions (e. g. , human errors) by the organization. They identify the relationship between attributions of crisis responsibility and the threat to reputation through a range of crisis types, which are classified into three clusters based on attribution of crisis responsibility: 1) the victim crises (e. g. , natural disaster, rumor, workplace violence and product tampering), in which the company is regarded as a victim of the crises and thus is attributed to have low level of crisis responsibility; 2) the accidental crises (e. g. technical-error accidents, technical error, product harms and challenges) are considered unintentional or 8 Hamlstad University Feng(2010) uncontrollable by the organization, and thus cause moderate attributions of organizational responsibility; 3) the preventable crises (e. g. , human-error accident, human-error product harm and organizational misdeed) are viewed as intentional and inappropriate actions taken by organizations to place people at risk, or violate a law/regulation, thus lead to high attributions of crisis responsibility (Coombs and Holladay, 2002; Coombs, 2007).

Crisis responsibility is negatively related to corporate reputation (Coombs, 2007). The more responsible an organization is held to be for a crisis, the more negative the perceptions and the greater the damage to brand, image and reputation (De Blasio and Veale, 2009). Hence, a preventable crisis which leads to greatest attributed crisis responsibility in turn results in the greatest harm to organizational reputation (ibid).

Crisis responsibility triggers affective reactions as well as being a reputational threat, especially the intentional crisis cluster (Coombs, 2007). Negative emotions can cause stakeholders to criticize a company (engage in negative word of mouth) or to cease interactions with the organization (ibid). The more serious a crisis is perceived to be, the more involved the public become, the more negative emotions are triggered and, subsequently, the greater damage posed to organizational reputation (De Blasio and Veale, 2009).

The Effect of Favorable Prior Brand Image and Reputation Researchers have demonstrated that good prior brand image and reputation have the potential to protect a company from harm caused by crises (Dawar and Pillutla, 2000; Coombs and Holladay, 2006; Dawar and Lei, 2009). When encountering negative publicity, consumers differentially weight aspects of the crisis information, such as the dangers of the product and the firm’s responsiveness, depending on their prior expectations (Dawar and Pillutla, 2000).

The informational basis and other strength-related characteristics of a prior attitude will influence subsequent judgments and evaluations (Pullig, Netemeyer and Biswas, 2006). Dawar and Lei (2009) suggest that consumers perceive familiar brands to carry less “responsibility” for the crisis, because when a crisis occurs at a familiar brand, consumers’ direct or indirect experiences with the brand will allow them to easily retrieve he pro-attitudinal information, which in turn reduces the influence of the crisis information. Therefore, the positive prior evaluations of familiar brands create a hypothesis-confirming context in which consumers interpret crisis information, leading to diminished negative impact on brand evaluations (Dawar, and Pillutla, 2000). In this way, Consumers’ existing positive expectations may provide firms with a form of insurance against the potentially devastating impact of crisis (ibid).

By linking benefit association with a brand, Dawer and Lei (2006) argue that the perceived seriousness of a crisis and the impact of the crisis on brand evaluations are a function of the relevance of the crisis to the brand’s key benefit associations. Since benefit association provide a central reason for consumer’s choice of a specific brand over other in the category, consumers may assess how seriously the crisis damages the brand depending on how relevant the crisis is to the key associations (Dawer and Lei, 2006).

The less relevant the crisis is to the key associations, the less serious the crisis is perceived, the fewer damages occur to the brand image. In addition, proposed by Coombs and Holladay (2006), a favorable prior reputation can act as halo effect that protects an organization’s reputation during a crisis in two aspects: 1) halo as benefit of the doubt, which means if a consumer holds a general favorable view of the company, the consumer might assign the company less crisis responsibility which in turn result in less reputational damage 9

Hamlstad University Feng(2010) from the crisis; 2) halo as shield, which serves as a part of the larger psychological phenomenon of expectancy confirmation, emphasizing that stakeholders will focus on the positive aspects of the organization and ignore the recent negative information created by the crisis. In these ways, a good prior reputation perceived by consumers plays as halo effect that has the potential to reduce its attributed crisis responsibility and dismiss the impact of the crisis on the brand (Coombs and Holladay, 2006).

Therefore, the stronger and more positive the organizational image and reputation, the more resilient it may be to potential damage to its reputation. Post-crisis Reputation and Buying Intention On a macro-level, an organization is expected to suffer some loss in reputation capital from a crisis (Coombs and Holladay, 2006). As discussed above, how much reputational damage occur and how about the post-crisis reputation looks like in the mind of consumers may mainly rely on how the consumers perceive the company’s prior reputation and brand image, attributed crisis responsibility, and its handling of the crisis (Coombs, 2007).

The more positive these aspects they have perceived, the less negative post-crisis reputation they declare, and the more likely they generate positive attitude and behavioral consequences for the company, such as, loyal attitude, buying intentions; vice versa (ibid). Consumers’ overall perceptions towards a company in the context of crisis can affect consumer’s trust in that company and its product and service (De Blasio and Veale, 2009). According to Morgan and Hunt (1994), trust is one of the most important moderators of long-term relationship; it plays an important role in developing loyalty.

Corporate reputation is rooted in trust and ethically shaped over time, and can be a highly visible signal of an organization’s capabilities and reliability providing information about future performance (Dolphin, 2004). When consumers hold good overall perceptions about the affected company, they are likely confident that the company will correct its mistakes from the crisis and has the capability to perform better in the future, on the basis of their trust beliefs.

Trusts are developed in relationship, where consumers have direct interactions with the company over times. Such consumers’ experience-based beliefs are powerful, it reinforce and strengthen the brand meaning with existing customers, generate positive word-of-mouth, and stimulate new customer trials (Berry, 2000) TOYOTA CASE FINDINGS Toyota is the one of the world’s largest automakers, based in Toyota, Aichi, Japan. Since its establishment in 1937 in Japan, Toyota has a long history of building safety, reliable and high quality vehicles.

Today, the company manufactures vehicles and parts at 53 production sites in 27 countries and regions around the globe, with a variety of sub-brands categories such as Lexus, Yaris, Corolla, Camry, Toyota trucks, and the world’s first gas/electric hybrid Prius, etc. (Toyota website). Its vehicles have been well known for quality, reliability and fuel efficiency. Recent years, Toyota’s fast global expansion made it successfully exceed General Motors in production and sales in 2008 to become the world’s largest automaker.

Its success has long been regarded as the pinnacle of Japanese innovation, manufacturing quality and industrial strength (The Economist, Feb 13, 2010). Its “lean” manufacturing techniques and culture of continuous improvement were the envy of the business world (ibid). This pioneering lean manufacturing technique includes continuous process improvement, flexible production with just-in-time principle, and removing waste without removing 10 Hamlstad University Feng(2010) value (Angel, 2008).

So far, America has become Toyota’s largest market, where Toyota is rank as one of the top-selling brands (Toyota USA website). Toyota Crisis Overview However, Toyota’s leading position has changed since the end of 2009. A highly publicized fatal crash of a Lexus ES 350 happening on August 28th, 2009, which killed four passengers of a family inside the car in United States (Los Angeles Times, Oct 25 2009), has triggered Toyota’s largest officially recalls and brought Toyota to the crisis misery.

So far, Toyota has announced recalls of approx 9 million vehicles globally across a wide range of its sub-brands (Toyota website), due to problems associated with “unintended acceleration”. According to Stewart (2010), Toyota has a full-blown crisis on its hands, but the problem has been compounded by a long-delayed and less-than-reassuring response from Toyota. By looking back from the beginning of the horrific Lexus accident, quality complaints and safety problems involved in Toyota vehicles have been brought to light with the increasing investigations by The National Highway Traffic Safety Administration (NHTSA) in North America.

Toyota American Sales organization (TMS) previously attributed the problem in the Lexus to an incompatible floor mat that may potentially interfere with accelerator pedal (Los Angeles Times, Oct 25th 2009). They issued a public safety advisory on Sep 29th 2009 inform the owners of specific Toyota and Lexus models of the ill-fitting floor mat problem, and then followed by the first large-scale recall announcement in November 2009 for remedy of this problem (Toyota USA Newsroom).

However, Toyota’s explanation of ill-fitting floor mats was questioned by NHTSA, stating that the problem was “related to accelerator and floor-pan design” (Stewart, 2010). Consequently, the problem of gas pedals that get stuck led to Toyota’s second large recalls of 2. 3 million vehicles in U. S. market, as well as the third recall announcement of 1. 8 million vehicles in European markets in January 2010.

Meanwhile, Toyota released the decision about temporarily suspending production at most of its North American plants and halting sales of eight popular models in U. S. market (Toyota USA Newsroom). These issues put Toyota’s reputation at a high risk. Suspicion and criticism toward Toyota were full of headline among mass media, especially in North America. By late January 2010, Toyota began issuing apologies and promises to do better; its engineers brought up a fix for the accelerator pedals and began rushing it to dealers around the world (Welch, 2010).

In face of the blame from mass media presses, Toyota maintained that the recalls and actions were taken voluntarily rather than the insistence from NHTSA, with the intention to “help ensure the safety of our customers and restoring confidence in Toyota”, according to Group Vice President and Toyota Division General Manager Bob Carter (Toyota USA Newsroom). Subsequently, Jim Lentz, president of Toyota’s U. S. organization TMS, apologized for the recall and acknowledged it was embarrassing for the company that built its reputation on the reliability of its vehicles (Linebaugh, Mitchell and Wakabayashi, 2010).

Despite Toyota announced remedy solutions to fix the recalled cars, fresh reports of sudden-acceleration incidents continued to crop up from American Toyota owners involving vehicles excluded in the recalls, raising suspicions that whether the company has identified all of the factors that could cause unintended acceleration, which was closely linked to a failure of vehicle’s heart ‘the vehicle electronic throttle control system’ (ibid). In a conference call with reporters, Mr. Jim Lentz gave explanation that “these two fixes solve the issues that we know 11 Hamlstad University Feng(2010) f,” and “we have done exhaustive testing, and we have found no evidence of problems with the electronics” (ibid). Akio Toyoda, Toyota’s CEO, issued his public apology candidly at a news conference in Tokyo on Feb 5th 2010, emphasizing that they will “go back to the basics of “customer first” and “genchi genbutsu”(means ‘go to the source to find the problem’) by improving products quality around the world. He added that he will be the head of a global quality task force newly formed to lift quality standards within the company (Toyota Website). However, bad news seemed not to end up.

Toyota’s tragedy were aggravated again with their further recall announcements in February 2010 including: the Hybrid vehicles containing the celebrated Prius with antilock brake problems in Japan and American markets; and the Tacoma trucks with drive shaft problems in American regions (Toyota USA website). After years of being the benchmark for quality, Toyota has been losing its edge even as its rivals catch up (Welch, 2010). Some analysts estimated that the immediate impact of Toyota’s global recalls and sales stoppages could cost Toyota more than $2 billion USD (Trottman and Mitchell, 2010; Businessweek. om). Meanwhile Toyota could be forced to spend considerable amounts on advertising, sales incentives and legal bills (Linebaugh et al. , 2010). Moreover, Toyota has been blamed for its misreading and mishandling of the crisis. The longer-term damage to the automaker’s brand could be much larger, according to Linebaugh et al. (2010). To respond those negative issues, Toyota maintains that they never misled regulators and they properly responded to potential safety problems (Linebaugh, et al. , 2010). We’re committed to doing everything we can – as fast as we can – to restore consumer trust in Toyota, and these recalls are part of this effort,” said Mr. Jim Lentz (Toyota USA website). Toyota President Akio Toyoda also outlined the company’s plans for earning customer trust back, stating that: “we are taking responsibility for our mistakes, learning from them and acting immediately to address the concerns of consumers and independent government regulators” (Toyota website). As BusinessWeek reported on Jan. 9, the company planned to break its silence, with an explanatory newspaper ad, as well as more tools such as the internet, social media, cable TV, etc. (Bush and Thomaselli, 2010). Special recall web pages were created in late January 2010 with latest recall and repairing information, along with posing some updated statements officially released by Toyota. Through various online or offline communicating tools, Toyota has attempt at highlighting its existing goodwill on, for instance, innovative technologies, excellent engineers, brilliant history, as well as its consistent social mission for making contribution to sustainable environment.

In the American market, in order to solve quality problems involved in its cars, one area that Toyota has to focus on is how it manages its relationships with suppliers, which as outside firms play a big role in making engineering components for Toyota (Welch, 2010). There are reports pointing out that in recent years Toyota has been demanding that suppliers make parts more cheaply (ibid). Those accelerate pedals which had the potential sticking risk were mainly made by Toyota’s major supplier CTS Corp.

Toyota American organization addressed that they have been working closely with supplier CTS on a revised design that effectively remedies the problem associated with accelerator pedals. In addition, an independent North American Quality Advisory Panel consisting of external distinguished group of safety and quality experts has been formed to advise the company’s North American affiliates on quality and safety issues. In retrieving customers, TMS in March 3rd 2010 announced plans to launch the company’s most far-reaching sales promotion programs for American customers 12

Hamlstad University Feng(2010) includes 0% APR financing, low leasing rate, and complimentary two-year premium maintenance offers (Toyota USA Newsroom). Although Toyota has working on the crisis, the way they handling the crisis in United State seems not easy to go: they had to confront with three times testimonies in the American Congressional hearing; to pay $16. 4 million civil penalty imposed by NHTSA for accusing Toyota of a deliberate delay in recalling the vehicles by hiding its defects; and Toyota have been withstanding intense investigation from U. S. overnments and extensively keen-edged coverage from mass media. Dealing with the issues after a serious crisis is a long way to go before everything is back again. As Toyota stating, they are now “working as one, and putting all their efforts into new initiatives aimed at rebuilding consumer trust and contributing to society through our products and services. ” (Toyota website). In sum, the following table shows the related events including five times’ major recalls and other issues that lead to the escalating crisis involved in Toyota since August 2009: Table 1 – Toyota crisis events Aug. 8th, 2009 A fatal crash of a Lexus car in USA due to the gas pedal was stuck was highly publicized that brought “unintended acceleration” problems of Toyota cars to the light with increasing investigations by NHTSA in USA. Toyota attributed the problem in the Lexus to the incompatible floor mat, but their explanation couldn’t convince NHTSA and public in USA. Toyota issued a public safety advisory suggesting owners of specific model about the ill-fitting floor mat issues in North America. 1st large Recall for potential accelerator pedal entrapment problems (ill-fitting floor mat), U.

S. market, 4. 2 million vehicles. nd 2 large Recall for sticking accelerator pedal problems, U. S. market, 2. 3 million vehicles covering 8 models. Toyota Temporarily suspends production and sales of selected vehicles in the U. S. market. rd 3 large Recall for potential accelerator pedal issues, European markets; 1. 8 million vehicles. Toyota began issuing apologies and breaking silence with response to the crisis under the tense pressures from public media and governments in America. Toyota’s CEO Akio Toyoda made public apology for the recalls and nnounced global quality task force for focus on quality issues. th 4 Recall for antilock brake system (ABS) software problems on 2010 model-year Toyota Prius and Lesus HS 250, Japan and U. S. markets. th 5 Recall for inspecting the front drive shaft on 2010 model year Tacoma 4WD trucks, U. S. market. Three times testimonies to the Congressional Hearing in USA. Toyota agree to pay $16. 4 million civil penalty imposed by NHTSA in USA related to Toyota’s recall for slow-to-return and sticky accelerator pedals, but Toyota denies NHTSA’s allegation that it violated the Safety Act or its implementing regulations.

Source: Toyota Website (2010) Late of Sep. 2009 Sep. 29 , 2009 Nov. 25 , 2009 Jan. 21st, 2010 Jan,26 , 2010 Jan,29 , 2010 Late Jan. 2010 Feb. 5 , 2010 Feb. 09 , 2010 Feb. 12th, 2010 Late Feb. to Mar. 2010 Apr. 19, 2010 th th th th th th 13 Hamlstad University Feng(2010) Toyota Crisis in Sweden From the above information we could find that the serious impacts of the crisis on Toyota were mostly coming from the United State. To investigate the influence of the crisis in a more specific way, Halmstad market in Sweden is researched.

The following sections present the primary data collecting from interviews with Toyota’s dealer and car consumers in Halmstad city, showing what the Toyota crisis is perceived in Swedish market. Toyota Swedish Dealer’s Reflection Compared the strenuous troubles in USA, it is surprising to find that Toyota has a different situation in Swedish market. The crisis is not a really big deal that influence Toyota brand in Sweden. According to the sale executive in Toyota center in Halmstad of Swden, what recently happened in Toyota is ot a big issue since those quality problems never happen in Toyota’s vehicles in Sweden. He insists that Toyota didn’t have real quality problems with its cars, all the recalls made by Toyota are voluntary for the purpose to reduce potential risks within the affected models as well as reassuring its customers; the recall is normal issues in car industry, there are no repairs in the recalled vehicles but just little modification to make the affected cars even better.

Those negative coverage related to Toyota in USA are not consistent with what things really are within Toyota. “When you became largest, the other competitors envy you and always want to put you down, this would happen in many biggest companies not only in Toyota”, the dealer says. While the recall news were exposed negatively, they would tend to eliminate unnecessary anxieties among customers through clarifying what really happen in Toyota when the customers made calls. We explain to customers and assure them there are no such problems happen in Sweden; we never want to sell cars with brake problems or something defective; we are always concern about our consumer, concern about the safety quality of our cars. ” According to the interviewed sales executive in Toyota Center in Halmstad, they have a head office named Toyota Sweden AB in Stockholm, which is responsible for guiding and communicating with other dealers around Sweden, as well as in charge of the recall issues in Sweden. Swedish dealers can get consultant advices from this head office.

Accordingly, when Toyota officially released the recall announcements of affected vehicles involved in Sweden, Toyota Sweden AB in Stockholm is responsible for informing the Swedish owners of the affected cars with mail letters, by suggesting those consumers to contact their local dealer for arranging fix appointments. The interviewed sales executive states that they are satisfied with the interaction process with the head office in Stockholm; they are confident that Toyota is taking effective and professional measures in dealing with the problems.

As for consumer complaints, he points out consumer complaints could always take place due to different daily indisposition in cars, regardless of the recalls issues happen or not. Since Toyota in Sweden didn’t have the similar issues as exposed in USA, the recall crisis do not have significant impact on the sales of the dealer. “We don’t have the same problems, but it of course more or less influences our sales when bad things were reported”, the interviewed sales executive says, “I’m not sure how much he effect occur, but in Sweden that [issues] haven’t affected [us] too much, because now we are selling the same numbers as we did a half of year ago, so I don’t think Toyota’s situation is really bad in Sweden. ” 14 Hamlstad University Feng(2010) Swedish Consumers’ Reflection Since the consumer respondents can be separated into two distinct groups – the Toyota customers and other brands’ consumers, it is interesting to compare their reflections to see how the both groups’ consumers perceive differently on Toyota crisis as well as the brand.

Some typical statements among the consumer respondents are showed in Table 2, which clearly reflects their cognitive and affective opinion toward Toyota crisis and the brand. The Toyota customers. The respondents within this group are mainly found in Toyota’s store. Some of them have owned Toyota cars before, while the others are new customers who didn’t have Toyota cars but visit the dealership store with purchasing intentions. The Toyota customers as observed are mostly in the middle age and elderly people, who usually tend to drive the cars with relatively lower speeds within cities.

Being less influenced by news coverage about the crisis, Toyota customers in Sweden are not as sensitive as American stakeholders perceive toward negative aspects of Toyota, such as quality problems, delayed handling crisis, etc. Being different from the affected American consumers, Toyota owners and new customers in Sweden do not exhibit much anxiety and panic by the recall events. Their attitudes toward the issues are mostly depended on their real past experiences with the brand or friends’ word-of-mouth effects.

Accordingly, customers in this group have showed relatively loyal attitude toward Toyota, as well as presenting strong affective bonds to the brand. Their opinions about the brand are kind of positive even though Toyota is undergoing the troublesome crisis. They tend to trust in Toyota’s reputation, without perceiving the crisis as big as what has been reported in American mass media. Although with a little worry about potential safety problem, most of loyal consumers still think that Toyota cars are quality and energy saving with relatively good prices.

Despite realizing that Toyota is getting some troubles with the massive recalls and involving serious problems in USA, they believe that Toyota will solve this out and make it better in the future. Still, when stepping into Toyota dealership store, these customers would be willing to buy Toyota cars according to their own interests and needs, regardless of recall events. The other brands’ consumers. Compared with the above Toyota customers groups, the respondents within this group have shown relatively different opinions toward the crisis issues and Toyota brand.

Since the respondents in this group are randomly selected in gasoline stations and parking places in Halmstad city, the backgrounds of the interviewees are mixed across a wide range of age, with different professions and interests. Therefore, their answers are various, depending on their background and the degree of awareness of the recall issues. Those who have little knowledge about Toyota’s troublesome recalls show little interests in talking about the crisis. While, the others who know much about cars are more willing to share their knowledge, which help to increase the opportunity to gain more deepened insights about the case.

Since the interviewed consumers of this group are using other brands’ cars, most of them do not have direct experience in driving Toyota cars. Their knowledge about Toyota mainly depend on their awareness of Toyota’s brand image, as well as making evaluation by instinctively comparing Toyota with the brands they are using. Furthermore, most of them admit the situation in Toyota is kind of troublesome in USA but not in Sweden. They think car recalls is normal in car industry, not only happen in Toyota. As for the buying intention, most of the respondents in this group reveal their 15

Hamlstad University Feng(2010) Table 2 – Typical Statements of Swedish Vehicle Consumers Toyota customers (owners and new customers) “I have a Yaris and it is reliable and economical. ” Other brands’ consumers “I think it’s a wide brand with high function. ” “It’s about fuel efficiency and fit for those who want an economical car, but if you enjoy fast driving, Toyota is not that kind. ” “Toyota could be good in sustainable and innovative things, but since I’m Swedish, I more prefer our national brands which also have very quality function and more suitable for my personality. “I don’t think it is a bigger thing as media and newspaper report…it’s serious of course what happen in USA, but it can happen in any cars and I don’t think it’s so important to quality safe. Maybe in USA I don’t’ know, but in Europe I don’t think so. ” “I’m not sure how exactly Toyota is handling this, I didn’t read much about this, but I guess they’ll solve this out with professional. ” “[As being an engineer working in another automaker], I know too much [about cars]… I don’t think Toyota should take the full responsibility for the problem.

It is always customer complaining accelerate pedal get to stuck, but maybe they press the accelerate pedal as the brake pedal, and they are so sure they didn’t [do wrong]! So it’s hard to handle those issues, and no one trusts the technical specialist from the car manufacturer thing. But I think Toyota should handle this earlier to be clearer to the customers and the governments. However, the picture we have is that Toyota have a long time trying to buy this down and just say we don’t have any problems, and now they have this huge crisis caused by this. “Handling this serious now, keeping the public informed in time, then I think they may gain reputation again, but it takes time. ” “They have lost some credits from safety point of view right now because of the crisis. In two years, they will recover, but right now, maybe they have lost sales. They had sales stops [in America] because the recalls. ” Prior brand Image Toyota Crisis Crisis handling Post-crisis reputation “Toyota is my favorite brand,…we driving too much, me and my wife, we are saving for much gasoline, saving about 7 thousand SEK per year. ” “Capability, good technology, good service, and you can go with very good quality. “My friend who works with cars said it is a good car, and you can get a good car for nice money. ” “We have two Toyota cars [which have been] running so many kilometers and just worked perfect. There’re not any such serious problems with my cars at all. I don’t think the problem is really so big, but maybe the news media is more so become reporting problems than reporting good things. ” “[I’ve heard that they have] the problems with the brake and the gas pedal…but I don’t think it is a serious problem, because the first I know it is a good brand for years. “Actually I haven’t heard much about Toyota response… I do care about [quality], I see the news, but since I have good experience with Toyota, I still very trust in Toyota, they will be nice to recall the cars together and fix alright. ” “I got the recall notification letter, the dealer told me there was nothing wrong with it and that is just a voluntary recall for small modification. But since I more care about safety problem, I think Toyota parent company needs to report honestly what has happen, to be more open to the public. Toyota has given me years of reliable service, and I’ve always had respect for Toyota. I believe they’ll be getting better in the future. ” “Perhaps Toyota has some troubles right now due to such big recalls, but I hope Toyota gets this solved correctly and still retains their reputation. ” “Toyota will definitely have my trust as long as they stay honest and avoid the same mistakes happening again. ” “So far it has been good, I want to buy another one. ” “This is the first time we checking Toyota, if the price is suitable, I would consider to buy one. “Because we drive mostly in the city, it is good to have a car that driven by electricity, not so much by gas. ” Buying intention “It depends on the price, and what it can help to hold money many years a car if it is new or not or whatever and the guarantee as well. ” “Buying a car is a big decision, I’ll consider about price, service, insurance guarantee, quality, living place and other things as a whole, other than to be simply influenced by recall issues. ” Source: primary data collection from interviews with Swedish vehicle consumers 16 Hamlstad University Feng(2010) reference in the brands they are using, while pointing out that they would not be influenced so much by a recalled crisis, instead, what can really influence their buying intention depend on many factors as a whole, such as the price, the guarantee, the insurance, the design, brand personality, etc. Overall, the perceptions of the Swedish drivers toward the Toyota crisis are quite mixed, but one common thread is that the Swedish respondents do not think the Toyota has so many serious quality problems as what extensively reported in America. Toyota’ crisis situation in Sweden is comparatively less serious.

The Swedish consumers all believe that Toyota will recover in the future and regain its reputation. ANALYSIS The analysis will be made on a basis of combination with the pre-understanding of crisis management theory and the empirical data, by answering the three research questions respectively as follows: (1) What are the reasons that force Toyota coming to the troublesome crisis? Crises pose certain risks to an company – potentially affecting critical aspects like reputation, image, brand equity, credibility, publicity, financial viability, legitimacy, community standing, etc. Smudde, 2001). In auto industry vehicle recalls happen all the time and everywhere. However, the Toyota massive recalls show a very different situation and involves more serious consequences. We have seen that almost 9 million of Toyota vehicles around the world had to be recalled within a few months, and the potentially defective quality involved were mainly focused on unintended acceleration problems, which were closely related to the most important thing for drivers – safety driving. It’s thus hard to believe that there was nothing wrong with Toyota’s “quality” cars.

The massive recalls were indeed a disaster for Toyota: not only means that they had to pay for the extensively financial losses due to repairing costs, market and stock share dropping down, production suspending, civil penalty, and other relevant expenses for dealing with the troublesome issues; but also it has heavily hit to Toyota’s intangible assets – its brand image and reputation of quality, which have been ethically shaped over time (Fill, 2006; Dolphin, 2004) and in turn influence the brand value (Wang, 2005).

Although Swedish consumers do not blame Toyota itself that much for the crisis, by looking through the whole process it is obvious to find that the sequentially massive recalls were not just a couple of simple faults mechanically in the complicated machine; there should be something ignorant in the their management. Reputational troubles can come in many forms, from a wide variety of causes and from many pu

Objectives

Objective of this topic is to giving a scope about the recent global financial crisis 2007 which discussing about the causes and impacts of the crisis and focusing mainly in the United States. Then, it will focus on the policy response of the country towards the crisis.

Role of the International Monetary Fund (IMF) is also given attention to understand how it works as the ‘international lender of last resort’.

Introduction

Financial institutions which play an important role in the economy, act as intermediaries between borrowers and lenders. Channelling of funds to individuals or firm that have bright investment opportunities takes place in the financial markets. Without financial intermediaries, it is difficult for companies to operate business. The economy also cannot operate efficiently if the financial system does not perform the role well.

Systematic risk is a risk that could be failures of financial institution that freezing up capital market and eventually reduces the supply of capital to the economy. The United States experienced this systematic failure during 2007 and continues to struggle its consequences until 2009. Financial crisis occur when an economic encounter recession or depression caused by lack of liquidity in financial institution. In this circumstances, financial institutions lose huge part of their value. Financial crisis is not the same as economic crisis which affect the entire economy.

A financial crisis can occur in a single sector and not always affect other sectors. The causes of financial crisis are different with the type of crisis. The financial crisis 2007-2008 started in August 2007 as a subprime mortgage crisis concentrated in the United States. The crisis became global but originally started in the financial sector of the United States and soon became global economic crisis. Mostly economies in the world were affected by this crisis because the United States economy can be thought as powerful economy in the world.

Types of Financial Crisis

Banking Crisis

Banks normally function by providing deposit accounts to people who want to make savings and it can be withdraw anytime. The banks then use these deposits to make loans and charge interest to borrower which are paid over a long period of time. If all the depositors want to withdraw money at one time, the banks will face lack of cash flow and will be bankrupt. This situation is called banking crisis.

Speculative Bubble

Some people buy stock by speculating the price, hoping that price of the stock will increase in the future.

Therefore, if most investor buy stock speculatively, chances that the stock price will increase are be very high. When all the investors want to sell at the same time, then the price will likely to fall. When price of a stock is more than its current price plus dividends and interest, then the stock is said to show a bubble.

International Crisis

This crisis occurs when a country is forced to devalue its currency. This can happen either because of speculative attack or a country is default in paying its debt. When this occurs, all countries that were trading with this country will be affected.

Investors also will lose the value of their investment because the currency has been devalued to lower rate.

Causes of the Financial Crisis 2007-2008

Loose Monetary Policy

Monetary policy implemented by the Federal Reserve plays an important role in determining the interest rate. It is believed that loose or weak monetary policy implemented by the U. S Federal Reserve is among the cause to the crisis. After the internet or dotcom bubble in 2000, loose monetary policy is applied by the U. S Federal Reserve. The federal funds rate dropped from 5. 8% in January 2001 to 1. 73% in January 2002 and remained low for several years as shown in chart 1. This policy thus encourage U. S consumption, reduced savings and created high current account deficit. The Federal Reserve had made mistake by its decision to keep the federal funds rate too low for too long. The policy therefore responsible for creating the credit boom and housing bubble. In other words, with a low federal funds target, banks take advantage on cheap funding and made cheap loans available. From year 2000 to 2006, total debt outstanding for the U. S has increased by $13. 5 trillion. The debt to GDP ratio is increased to 350%. This high level of debt made firms and households more exposed to adverse economic shock. Other than that, the Federal Reserve and regulators made mistake in the failure to control the poor underwriting standards in the mortgage markets. The poor underwriting practices can be seen through no down payments, no verification of income, asset and occupation by borrowers. Credit that was widely available suggested poorer loan quality. Chart 1: Loose monetary policy Source: Adapted from The Economist

Chart 1 shows that the actual interest rate fell below the Taylor rule, that is the interest rate what historical experience suggest policy should be adapted. The line slopped downward to 1 percent in 2003 to 2004 and then rises until 2006. The Taylor rule line shows what interest rate would have be if the Fed followed the policy that worked well since the early 1980.

 Global Imbalances.

The recent financial crisis happens when there is much liquidity in world capital markets. It is due to the large payment imbalances between the main countries and regions in the world economy.

Global imbalances occur when there is huge and continuing current account deficit in the United States. The current account deficit is financed by plenty of flows of capital from emerging and oil exporting countries. As the consequences, the global imbalances encourage financial activity that would not be effective in long time without the development of deep global financial markets. High levels of global liquidity happens when countries such as China built up current account surpluses and foreign exchange reserves, maintaining artificially low exchange rates and a positive saving investment balance.

Because of this liquidity level, global real interest rates fell which contributed to credit expansion and rising asset prices that drives to the crisis.

Credit Boom

Credit boom happens when banks and mortgage brokers encouraged mortgage sales because they earned fees in proportion to the volume of mortgages they wrote. Banks earned large fees by securitizing mortgages, selling them to capital markets in forms of mortgage backed securities (MBS) and collateral debt obligations (CDO). Since banks distributed these mortgages to capital markets as asset backed securities, it has low risk upon the process.

Compared to corporate bonds that had low interest rate during the time, these complex and risky products is highly demanded by institutional investors such as hedge fund and insurance companies. Mortgage sales expanded even to those who could not afford them as the banks only focused on earned large fees. When the housing price bubble evaporated or interest rates rose it turned out to be large defaults. Home sales peaked in late 2005 meanwhile home construction spending and housing prices decline in early 2006. When the subprime mortgage crisis started in 2007, the entire market began to collapse.

The crisis began in the United States, but because the mortgage based financial products has been spread around the world it soon became global financial crisis.

 Asset Bubble

Another factor to the financial crisis is an asset bubble that leads to unsustainable leverage. Before the start of the crisis, the U. S government implemented a public policy that encourages homeownership. Because of low interest rate, it has led to mortgage lending and households were encouraged by the banks to borrow causing asset (house) price to increase.

The borrowing is allowed up to the full value of their property with little regard to their ability to service the debt. Borrowing is encouraged because of the low interest rate made by monetary policy makers. The demand for housing is related to money market interest rates. Thus, the accommodative policy conducted by the Federal Reserve contributed to the build up of housing demand and asset prices. The term sub-prime mortgage come when lending activities is also approved to people who did not meet the credit requirements that may default to payments.

Financial Innovation

Usually, banks and other agents innovate to avoid regulation and boost returns by taking greater risks. When asset prices increase more rapidly, innovation also accelerates as expected gains grow larger. The main innovation is the process of securitization. This complex ‘securitized’ pools of loans promising high returns with low risk. Thus, in the United States, ballooning mortgage loans to riskier borrowers provided the basis for an ever-larger inverted pyramid of structured products. As the housing prices increasing, lenders provide mortgage lending easily.

However the mortgage were securitised, that is repackaged and sold as financial instruments to investors for immediate cash. This led to excessive and irresponsible mortgage lending. The institutions that originated the mortgages such as commercial banks, savings and loans eventually did not holding the mortgages because it has been sold to investors by the investment banks. This innovation has caused massive distortions in incentives and risk management in the financial organizations. It was an instrumental in strengthen the increase in leverage.

Starting in 2003, banks involve rapidly in financing activities, investments and hedging operations that hard to assess risks. When asset prices began to fall, financial organization brought down together and spread panic among investors worldwide. This development has caused massive distortions in incentives and risk management arrangements within financial organizations.

Impact of Financial Crisis

Impact to U. S Financial System

The U. S government has closed 22 banks including Lehman Brothers, Washington Mutual and Indymac.

Other than that, it has rescued Freddie Mac, Fannie Mae, Bear Stearns and created a bailout fund around $700 billion to purchase stakes in effected banks. This step is taken in order to restore confidence in the financial markets. However, this $700 billion Troubled Asset Relief Programme (TARP) failed to restore market confidence. Nearly $8. 5 trillion or around 60% of its gross domestic product has been committed by the U. S government to prevent the collapse of its financial system.

Economic Growth Rates

The effect of 2007 crisis can be seen clearly on the downturn economic growth globally.

As shown in Figure 1, countries in the world are experiencing a downturn in economic activity as the effect of financial crisis. These declines in economic activity have been followed by losses of trillions of dollars in equity markets and a credit squeeze that are affecting households and businesses worldwide. Financing activities such as world trade and oil exploration has been slow during the time of crisis. As shown in chart 2 below, real growth rate measured by GDP across the world has been decreased. Real growth rate in reported by the World Bank is 3. 9% in 2007 dropped to 1. 3% in 2008.

As the crisis became worsen, economic growth dropped much lower rate to -2. 2% in 2009. The U. S economy has a large proportion in world economy therefore it has slightly similar trend in the growth rate. The U. S real growth rate in 2007 is 1. 9% dropped to -0. 4% and -3. 5% in 2008 and 2009 respectively. Chart 2: GDP – real growth rate (%) Source: Adapted from World Bank data

Personal Finances of US Citizens

People have struggled to repay their debts as the direct consequences of the financial practices that produced the crisis. The value of house dropped dramatically for individuals who owned house before the crisis broke out.

This caused some people repaying mortgages that are worth more than the current value of their house. Eventually, many people ended up losing the house that they bought in years before the crisis broke out. There were high rates of foreclosure in some area of the United States as borrowers cannot repay the loans. Other than that, individuals in the US also suffered from the loss of growth and income that their savings and investments would have produced. This is because interest rates for savings have dropped sharply. Investors and companies experiencing losses as the stock in many companies dropping rapidly.

Retirement plans that are usually based on mutual funds and performance of the stock market results not as they had planned as the stock market crashed. They may need to work longer or retirement plans is less than expected before. Moreover, it has become more difficult to borrow money. While expensive loan services have been expanded, people find it hard to obtain low cost loans or credit cards. 5. 0. 4 High Unemployment Rate. The US gross domestic product which is the total amount of goods and services produced by the country was reduced as the effect of the crisis.

Companies in the country struggled to cope with the crisis, however lots of people have lost their jobs. Based on chart 3, the uneployment rate grew from 4. 7% in 2006 to 10% in 2010 which was the highest rate in the last few decades. In addition to lose income, unemployment made it worse for many people because it has become difficult to find new job. Many companies are not willing to hire new employer and even a fresh graduates have to compete to find employment. This become a serious problem for many young citizens in the country. Chart 3: Unemployment rate in the US Source:Adapted from U.S. Bureau of Labor Statistics

Impact on the IMF

The damage caused by the financial crisis is a challenge for the IMF. This is because, its financial resource is not in line with the global economy over the past decade. The United States and other advanced industrial economies are at the center of the crisis. However, the IMF would not have enough resources to provide financial assistance if these countries seek for help. Therefore, the IMF resources need to be increase or the risk would become worse in the future.

Policy Response

 Term Auction Facility (TAF).

The Term Auction Facility is introduced in December 2007 so that banks can borrow from the Fed easily. Thus the banks can bid directly for funds from the Fed. This is because investors are not willing to lend when afraid about the condition of many financial institutions affected by the crisis. Consequently bank funding markets were put under severe pressure. The main objective of the TAF was to reduce the spreads in the money markets and in that way increase the flow of credit and lower interest rates. As a result, the TAF helped by encouraging the distribution of liquidity when bank funding markets were under stress.

The spread between the London interbank offered rate (Libor) and the overnight indexed swap (OIS) for loans of one-month maturity or longer increased to unusually high levels in the late 2007. It is believed that the increase in the Libor–OIS spread is caused by the heightened risk perceived by investors at the time. Since Libor affects interest rates on a wide variety of loans and securities (for example, home mortgages and corporate loans), the sudden spike in the spread was disruptive to the debt market and negatively affected the economy.

The chart 4 and the table below also showed six announcements related to the TAF program. Chart 4: The TAF facility provided term funding through periodic auctions to eligible depository institutions. By providing term funds to banks at regularly scheduled auctions, the TAF may have assured lenders of continued access to future funding and thereby reduced their uncertainty regarding anticipated funding needs. The TAF was a facility designed by the Federal Reserve during the crisis to improve liquidity conditions in various asset markets that is crucial to improve short term funding market. .

Economic Stimulus Act 2008

The Economic Stimulus Act 2008 is a response made by the government through several package totalling over $100 billion to individuals and families in the United States. The economic stimulus is designed to boost the U. S economy and prevent further recession. In this programme, the government provide tax rebates to low and middle income taxpayers and tax incentives to stimulate business investment. The purpose of the incentives is that the people will have more money to spend thus increase consumption and the economy.

By doing so, the government would expect that it will recover the economy. However it is not as hoped because they spend little although the incentives were given. This can be shown through chart 5. The top line shows personal disposable income increased at the time of rebate. However, the lower line shows consumption did not increase as expected. Chart 5: Increase in income

 Initial Cuts in Interest Rate

The third policy response to the crisis is sharp reduction in the federal funds rate. When the crisis began in August 2007, the rate was 5. 25% and went down to 2% in April 2008 due to the cut.

The lower interest rate then reduced the size of adjustable rate mortgage that was cause of the crisis. The most significant effect of this response is the depreciation of dollar and rise in oil price. In the early 2008, oil price increased almost two fold from $70 per barrel in 2007 to over $140 per barrel. High oil price hit the economy as gasoline price increased dramatically and automobile sales plunged. On the other side, the policy reduction in the federal funds rate that cuts interest rate helped raise oil and other commodity prices thus prolonged the crisis. Exchange rate also has influence to the rise of oil price.

As shown in chart 6, reduction of the federal funds rate at top line in July 2007 drives the oil price at the bottom line upward until July 2008. Chart 6: Cut in interest rate and increase in oil price

IMF Response to the Crisis

The main role of the IMF is to identify the risks that threaten global economic and financial stability and to develop policy responses. The IMF has a worldwide membership and its mandate is to promote economic and financial stability. It is has been provide forum for discussion of international economic issues and help to reach solution on policy responses.

In response to the financial crisis, the IMF boosted their lending to developing countries to help them cope with the crisis and to sustain the economic recovery. To meet ever increasing financing needs of countries hit by the global financial crisis and help strengthen global economic and financial stability, the Fund has greatly expanding its lending capacity since the start of the global crisis. It has done so both by obtaining commitments to increase quota subscriptions of member countries and securing large temporary borrowing agreements from member countries, including recent pledges of $456 billion.

Countries affected by the crisis can borrow funds from the IMF. Other than that, there is also debate about reforming the IMF. The reformation issues focus on the need to balance the traditional functions of providing short-term financial assistance and promoting external balance stability in member countries. To achieve the objective, there is a need for a wider responsibility of crisis prevention, supporting financially for countries that, although not suffering actual reserve shortage, are in danger of external shocks and liquidity runs. This measure would prevent more severe impact to member countries as the effect of financial crisis.

Since year 2008, the Fund has introduced effective instruments to prevent sudden falls in investors’ trust and the eruption of liquidity crises. As a result, borrowers were able to cope with the global crisis, avoiding large scale banking crises and disruptive exchange rate movements and protecting social spending. To prevent the crisis, the IMF has lending arrangements signed by the IMF and low and middle-income countries during the crisis. These lending arrangements take part from January 2008 and June 2010. The size of the loan arranged by the IMF is larger for country that is more exposed to the crisis especially for large country.

As a result this measure can prevent more severe contagion of the crisis to other countries.

Conclusion

The U. S. economy has suffered a few major shocks in recent years during the crisis. At the start, these shocks include a large declining in house prices and a spike in the prices of oil and other commodities. The decline in house prices reduced the value of mortgage backed securities. Because of leverage, this threatened the ability of many of financial institutions, including major investment banks. These shocks have combined to put the U. S. conomy and many economies throughout the world into a global financial crisis and a deep recession. It is likely the worse since the Great Depression in 1930sRegulatory failure is a main responsibility for the crisis. It is shown that weak regulatory in the financial system leaving the consumers inadequately protected. To cope with this crisis, the IMF had played an effective role. It has come out with a financial assistance by providing loan arrangements to the member countries. However, the financial crisis of 2007 therefore raises doubts in faith of the world financial system and in free enterprise.

The financial system has to take appropriate measures and reform to improve the situation in the future.

References

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India’s Agriculture Crisis Indian is an agricultural country. Even while India’s industrial and services sectors are growing by leaps and bounds and where growth rate of agriculture as below 2% the fact remains that India still lives in villages. Over 50% of India’s population is supported by agriculture. Even industrial and services sectors are invariably entangled with the fortunes of agriculture due to various intricate forward and backward linkages. There have been ominous signs which showed that the Indian agriculture is in crisis.

Unending chain of suicides by farmers in different parts of the country shows that everything is not well with agricultural sectors. Government of India is not sleeping over this crisis. National Commission on farmers has been constituted under the eminent Scientist Dr. M. S. Swami Nathan. He has recommended a comprehensive national policy for farmers to give an all round boost to the sector. However, it is sea sad state of affairs where government is busy in talking about superficial remedies instead of taking the concrete steps which is the need of the hour.

More waivers of interests and rescheduling of loans do not address the real problem, which is’ why caused the farmers’ distress in the first place? ’ The main problem is the poor state of infrastructure in the country. For example, many farmers face a perennial problem due to poor rains in certain parts of the country and there is no proper irrigation to counter this factor. Most farmers are also not aware of the proper cropping patterns.

The problem of faulty crop selection is also one of the major forces that drive farmers to poverty. Thus it is necessary to impart proper education to farmers and further develop infrastructure in rural areas. Developed India is possible with the attainment of growing, advancement of manufacturing and services sector. But prosperous India is possible only with healthy agricultural sector. The pride and confidence in farmers and farming needs to be restored. This alone can help agriculture grow like never before.