Morality and Ethics Case Study
When the survival of the firm is at stake, workers often make decisions that may violate moral and ethical principles. Some may view an action as a violation whereas others may view it as an acceptable practice. Every day, people are placed in situations that may require a moral or ethical decision.
Some companies have found a solution to this problem by creating a standard practice manual or corporate credo that provides guidelines for how these decisions should be made. The guidelines identify the order in which certain stakeholders’ interests should be satisfied.
The Project Management Lawsuit
A new president was hired and then restructured the company for what he thought would be better for project management to take place. In doing this restructuring, the president violated a contractual agreement that had been made with the vice president of engineering hired three years earlier.
HIRING THE VICE PRESIDENT
In 2006, Phoenix Company hired Jim as vice president for engineering. As with all senior officers, the hiring process included a written contract which clearly stipulated the criteria for bonuses, stock options, severance packages, retirement packages, and golden parachutes.
Jim’s bonus clause involved project management. All of the engineering projects would be headed up by project managers that would report directly to Jim. While part of Jim’s bonus was based upon overall corporate profitability, the selling price of the company’ stock, and other factors, the major portion of the bonus
©2010 by Harold Kerzner. Reproduced by permission. All rights reserved.
was based upon the profitability of the projects under Jim’s direct control. Jim was experienced in project management and believed that this bonus plan would certainly be to his advantage.
From 2006 through 2008, Jim’s bonuses were more than his actual salary and the size of his bonus increased each year. The company was doing quite well and Jim was pleased with his own performance and felt secure in his position with Phoenix Company.
HIRING A NEW PRESIDENT
In 2008, the president of Phoenix Company announced his retirement, to be effective the end of Decembe, 2008. The Board of Directors of Phoenix Company decided to look outside the company for a replacement and eventually hired a new president that had experience in project management. Initially, Jim viewed this as a positive factor, but this was about to change.
One of the first things that some executives do when taking over a company is to restructure the organization according to their desired span of control. This normally occurs within the first two months after a new president comes on board. Workers know that, if change will happen, it will be in the first two months.
The new president was knowledgeable in project management and had experience with the project management office (PMO). Phoenix Company had project management but did not have a PMO. The new president created a corporate PMO. Project managers in all divisions would no longer report to the division vice presidents and were assigned full time to the corporate PMO. The corporate PMO reported directly to the new president. With most PMOs, the project managers still report on a “solid line” to their respective division managers but report to the PMO on a “dotted line.”
The president’s decision to have the project managers permanently assigned to the PMO alienated the three divisions that had project managers, and the engineering division was particularly displeased. Most of the project managers were in the engineering division previously. The engineering division no longer had control over the projects, even the projects that were mainly within engineering.
The creation of the PMO had a serious impact on the bonuses of those divisions that lost their project managers. In effect, what the creation of the PMO did was to transfer profit-and-loss responsibility on the projects to the PMO. That meant that there would be no project profitability component as part of Jim’s year-end bonus payout.
In 2009 and 2010, Jim’s bonus payments were drastically reduced. In January of 2011, Jim resigned from the company and filed a lawsuit against Questions
Phoenix Company for the loss of part of his bonus payments over the past two years. Jim and his attorney claimed that the creation of the corporate PMO and the transferral of profit-and-loss responsibility to the PMO in effect violated Jim’s written agreement and affected his bonus.
- Why do most executives hire into companies under written contracts rather than a one-page employment acceptance letter?
- Does the president of a company have the right to restructure a company however he or she pleases?
- Did the president have the right to transfer profit-and-loss responsibility from the functional divisions to the PMO?
- Did Jim win or lose the lawsuit?
Managing Crisis Projects
Project managers have become accustomed to managing within a structure process such as an enterprise project management methodology. The statement of work has gone through several iterations and is clearly defined. A work breakdown structure exists and everyone understands their roles and responsibilities as defined in the responsibility assignment matrix (RAM). All of this took time to do.
This is the environment we all take for granted. But now let’s change the scenario a bit. The president of the company calls you into his office and informs you that several people have just died using one of your company’s products. You are being placed in charge of this crisis project. The lobby of the building is swamped with the news media, all of whom want to talk to you to hear your plan for addressing the crisis. The president informs you that the media knows you have been assigned as the project manager, and a news conference has been set up for 1 hour from now. The president also asserts that he wants to see your plan for managing the crisis no later than 10:00 p.m. this evening. Where do you begin? What should you do first? Time is now an extremely inflexible constraint rather than merely a constraint that may be able to be changed. Time does not exist to perform all of the activities you are accustomed to doing. You may need to make hundreds if not thousands of decisions quickly, and many of these are decisions you never thought that you would have to make. This is crisis project management.
UNDERSTANDING CRISIS MANAGEMENT
The field of crisis management is generally acknowledged to have started in 1982 when seven people died after ingesting extra strength Tylenol capsules that were laced with cyanide. Johnson & Johnson, the parent of Tylenol, handled the situation in such a manner that it became the standard for crisis management.
Today, crises are neither rare nor random. They are part of our everyday lives. Crises cannot always be foreseen or prevented, but when they occur, we must do everything possible to manage them effectively. We must also identify lessons learned and best practices so that mistakes are not repeated on future crises that will certainly occur.
Some crises are so well entrenched in our minds that they are continuously referenced in a variety of courses in business schools. Some crises that have become icons in society are:
- Hurricane Katrina
- Mad cow disease
- The Space Shuttle Challenger explosion
- The Space Shuttle Columbia reentry disaster
- The Tylenol poisonings
- Nestlé’s infant formula controversy
- The Union Carbide chemical plant explosion in Bhopal, India
- The Exxon Valdez oil spill
- The Chernobyl nuclear disaster
- The Three Mile Island nuclear disaster
- The Russian submarine, Kursk, disaster
- The Enron and Worldcom bankruptcies
Some crises are the result of acts of God or natural disasters. The public is generally forgiving when these occur. Crisis management, however, deals primarily with man-made crises such as product tampering, fraud, and environmental contamination. Unlike natural disasters, these man-made crises are not inevitable, and the general public knows this and is quite unforgiving. When the Exxon Valdez oil spill occurred, Exxon refused to face the media for five days. Eventually, Exxon blamed the ship’s captain for the accident and also attacked the Alaska Department of the Environment for hampering its emergency efforts. Stonewalling the media and assuming a defensive posture created extensive negative publicity for Exxon.
Most companies neither have any processes in place to anticipate these crises, even though they perform risk management activities, nor know how to manage them effectively after they occur. When lives are lost because of manmade crises, the unforgiving public becomes extremely critical of the companies responsible for the crises. Corporate reputations are very fragile. Reputations that had taken years to develop can be destroyed in hours or days.
Some people contend that with effective risk management practices these crises can be prevented. While it is true that looking at the risk triggers can prevent some crises, not all crises can be prevented. However, best practices in crisis management can be developed and implemented such that when a crisis occurs we can prevent a bad situation from getting worse.
For some time, corporations in specific industries have found it necessary to simulate and analyze worst-case scenarios for their products and services. Product tampering would be an example. These worst-case scenarios have been referred to as contingency plans, emergency plans, or disaster plans. These scenarios are designed around “known unknowns” where at least partial information exists on what events could happen.
Crisis management requires a heads-up approach with a very quick reaction time combined with a concerted effort on the part of possibly all employees. In crisis management, decisions have to be made quickly, often without even partial information and perhaps before the full extent of the damages are known. Events happen so quickly and so unpredictably that it may be impossible to perform any kind of planning. Roles and responsibilities of key individuals may change on a daily basis. There may be very active involvement by a majority of the stakeholders many of which had previously been silent. Company survival could rest entirely on how well a company manages the crisis.
Crises can occur within any company, irrespective of the size. The larger the company involved in the crisis, the greater the media coverage. Also, crises can occur when things are going extremely well. The management guru, Peter Drucker, noted that companies that have been overwhelmingly successful for a long time tend to become complacent even though their initial assumptions and environmental conditions have changed. Under these conditions, crises are more likely to occur. Drucker calls this “the failure of success.”
What is unfortunate is that most of the lessons learned will come from improper handling of the crisis. After reading each of the situations here, you will be asked a series of questions to determine if there were any common threads among the cases.
FORD VERSUS FIRESTONE
Product recalls are costly and embarrassing for the auto industry. Improper handling of a recall can have an adverse effect on consumer confidence and the selling Ford versus Firestone
price of the stock. Ford and tire manufacturer Firestone are still suffering from the repercussions of their handling of a product recall in 2000–2001.
In August of 2000, Firestone recalled 6.5 million tires in the United States primarily because of tread separation problems on Ford Explorers [sports utility vehicles (SUVs)]. The problems with the tires were known several years earlier. In 1997–1998, Saudi Arabia reported tread separation on the SUV Explorers. In August 1999, Firestone replaced the tires in Saudi Arabia. In February 2000, Firestone replaced the tires in Malaysia and Thailand, and in May 2000, the tires were replaced in Venezuela.
Initially it was believed that the problem may be restricted to countries with hot climates and rough roads. However, by May 2000, the U.S. National Highway Traffic Safety Administration (NHTSA) had received 90 complaints involving 27 injuries and four deaths. A U.S. recall of 6.5 million tires took place in August 2000.
Ford and Firestone adopted a unified response concerning the recall. Unfortunately, accidents continued after the recall. Ford then blamed Firestone for flaws in the tires and Firestone blamed Ford for design flaws in the SUV Explorers. The Ford–Firestone relationship quickly deteriorated.
The finger pointing between Ford and Firestone was juicy news for the media. Because neither company was willing to accept responsibility for their actions, probably because of the impending lawsuits, consumer confidence in both companies diminished as did their stock prices. Consumer sentiment was that financial factors were more important than consumer safety.
Ford’s CEO, Jac Nasser, tried to allay consumer fears, but his actions did not support his words. In September of 2000, he refused to testify at the Senate and House Commerce Subcommittee on tire recall stating that he was too busy. In October of 2000, Masatoshi Ono resigned as CEO of Bridgestone, Firestone’s parent company. In October of 2001, Jac Nasser resigned. Both executives departed and left behind over 200 lawsuits filed against their companies.
- Early-warning signs appeared but were marginally addressed.
- Each company blamed the other, leaving the public with the belief that neither company could be trusted with regard to public safety.
- Actions must reinforce words; otherwise, the public will become nonbelievers.
AIR FRANCE CONCORDE CRASH
On July 25, 2000, an Air France Concorde flight crashed on takeoff killing all 109 people on board and four people on the ground. Air France immediately grounded its entire Concorde fleet pending an accident investigation. In response to media pressure, Air France used its website for press releases, expressed sorrow and condolence from the company, and arranged for some financial consideration to be paid to the relatives of the victims prior to a full legal settlement. The chairman of Air France, Jean-Cyril Spinetta, visited the accident scene the day of the accident and later attended a memorial service for the victims.
Air France’s handling of the crisis was characterized by fast and open communication with the media and sensitivity for the relatives of the victims. The selling price of the stock declined rapidly the day of the disaster but made a quick recovery.
British Airways (BA) also flew the Concorde but took a different approach immediately following the accident. BA waited a month before grounding all Concorde flights indefinitely, and only after the Civil Aviation Authority announced it would be withdrawing the Concorde’s airworthiness certification. Eventually, the airworthiness certification was reinstated, but it took BA’s stock significantly longer to recover its decline in price.
- Air France and British Airways took different approaches to the crisis.
- The Air France chairman showed compassion by visiting the site of the disaster as quickly as possible and attending a memorial service for the victims. British Airways did neither, thus disregarding its social responsibility.
INTEL AND THE PENTIUM CHIP
Intel, the manufacturer of Pentium chips, suffered an embarrassing moment resulting in a product recall. A mathematics professor, while performing prime number calculations on ten-digit numbers, discovered significant round-off errors using the Pentium chips. Intel believed that the errors were insignificant and would show up only in every few billion calculations. But the mathematician was performing billions of calculations and the errors were now significant.
The professor informed Intel of the problem. Intel refused to take action on the problem stating that these errors were extremely rare and would affect only a Russian Submarine Kursk
very small percentage of Pentium chip users. The professor went public with the disclosure of the error.
Suddenly, the percentage of people discovering the error was not as small as originally thought. Intel still persisted in its belief that the error affected only a small percentage of the population. Intel put the burden of responsibility on the user to show that their applications necessitated a replacement chip. Protests from consumers grew stronger. Finally the company agreed to replace all chips, no questions asked, after IBM announced it would no longer use Pentium chips in its personal computers.
Intel created its own public relations nightmare. Its response was slow and insincere. Intel tried to solve the problem solely through technical channels and completely disregarded the human issue of the crisis. Telling people who work in hospitals or air traffic control that there is a flaw in their computer but it is insignificant is not an acceptable response. Intel spent more than a half billion dollars in the recall, significantly more than the cost of an immediate replacement.
- Intel’s inability to take immediate responsibility for the crisis and develop a crisis management plan made the situation worse.
- Intel completely disregarded public opinion.
- Intel failed to realize that a crisis existed.
RUSSIAN SUBMARINE KURSK
In August of 2000, the sinking of the nuclear-powered submarine Kursk resulted in the deaths of 118 crewmembers. Perhaps the crew could never have been saved, but the way the crisis was managed was a major debacle for both the Russian Navy and the Russian government.
Instead of providing honest and sincere statements to the media, the Russian Ministry of Defense tried to downplay the crisis by disclosing misleading information telling the public that the submarine had run aground during a training exercise and that the crew was in no immediate danger. The ministry spread a rumor that there was a collision with a NATO submarine. Finally the truth came out, and by the time the Russians sought assistance in mounting a rescue mission, it was too late.
Vladimir Putin, Russia’s president, received enormous unfavorable publicity for his handling of the crisis. He was vacationing in southern Russia at the time and appeared on Russian television clad in casual clothes, asserting that the situation was under control. He then disappeared from sight for several days, which angered the public and family members of the crew indicating his lack of desire to be personally involved in the crisis. When he finally visited the Kursk’s home base, he was greeted with anger and hostility.
- Lying to the public is unforgivable.
- Russia failed to disclose the seriousness of the crisis.
- Russia failed to ask other countries for assistance in a timely manner.
- Russia demonstrated a lack of social responsibility by its refusal to appear at the site of the crisis and showed a lack of compassion for the victims and their families.
In September 1982, seven people died after taking Extra-Strength Tylenol laced with cyanide. All of the victims were relatively young. These deaths were the first ever to result from what came to be known as product tampering. All seven individuals died within a one-week time period. The symptoms of cyanide poisoning are rapid collapse and coma and are difficult to treat.
On the morning of September 30, 1982, reporters began calling the headquarters of Johnson & Johnson asking about information on Tylenol and Johnson & Johnson’s reaction to the deaths. This was the first that Johnson & Johnson had heard about the deaths and the possible link to Tylenol.
With very little information available at that time and very little time to act, the crisis project was managed using three phases. The first phase was discovery, which included the gathering of all information from every possible source. The full complexity of the problem had to be known as well as the associated risks. Developing a recovery plan is almost impossible without having a complete understanding of the problem. The second phase was the assessment and quantification of the risks and the containment of potential damage. The third phase was the establishment of a recovery plan and risk mitigation. Unlike traditional “life-cycle” phases, which could be months or years in duration, these phases would be in hours or days.
From the start, the company found itself entering into a closer relationship with the press than it was accustomed to. James Burke, the CEO, quickly decided to elevate the management of the crisis to the corporate level, personally taking charge of the company’s response and delegating responsibility for running the rest of the company to other members of the executive committee.
There were several reasons why Burke decided that it was necessary to take control of the situation himself. First, Burke believed that the crisis could become a national crisis with the future of self-medication at stake. Second, Burke recognized that the reputation of Johnson & Johnson was now at stake. Third, Burke knew that the McNeil Division, which manufactured Tylenol, might not be able to battle the crisis alone.
The fourth reason was the need for a Johnson & Johnson corporate spokesperson. James Burke was about to become the corporate spokesperson. This was one of the few times that a CEO appeared on television. One of Burke’s first decisions was to completely cooperate with the news media. The general public, medical community, and Food and Drug Administration were immediately notified.
Instead of providing incomplete information or only the most critical pieces and stonewalling the media, Burke provided all information available. He quickly and honestly answered all questions from anyone. This was the first time that a corporate CEO had become so visible to the media and the public. James Burke spoke with an aura of trust.
Burke had several options available to him in handling the crisis. Deciding which option to select would certainly be a difficult decision. Looking over Burke’s shoulder were the stakeholders who would be affected by Johnson & Johnson’s decision. Among the stakeholders were stockholders, lending institutions, employees, managers, suppliers, government agencies, and the consumers.
Consumers: The consumers had the greatest stake in the crisis because their lives were on the line. The consumers must have confidence in the products they purchase and believe that they are safe to use as directed.
Stockholders: The stockholders had a financial interest in the selling price of the stock and the dividends. If the costs of removal and replacement, or in the worstcase scenario of product redesign, were substantial, it could lead to a financial hardship for some investors that were relying on the income.
Lending Institutions: Lending institutions provide loans and lines of credit. If the present and/or future revenue stream is impaired, then the funds available might be reduced and the interest rate charge could increase. The future revenue stream of its products could affect the quality rating of its debt.
Government: The primary concern of the government was in protecting public health. In this regard, government law enforcement agencies were committed to holding the responsible party accountable. Other government agencies would provide assistance in promoting and designing tamper-resistant packages in an effort to restore consumer confidence.
Management: Company management had the responsibility to protect the image of the company as well as its profitability. To do this, management must convince the public that it will take whatever steps are necessary to protect the consumer.
Employees: Employees have the same concerns as management but are also somewhat worried about possible loss of income or even employment.
Whatever decision Johnson & Johnson selected was certain to displease at least some of the stakeholders. Therefore, how does a company decide which stakeholders’ needs are more important? How does a company prioritize stakeholders?
For Jim Burke and the entire strategy committee, the decision was not very difficult — just follow the corporate credo. For more than 45 years, Johnson & Johnson had a corporate credo that clearly stated that the company’s first priority is to the users of Johnson & Johnson’s products and services. Everyone knew the credo, what it stood for, and the fact that it must be followed. The corporate credo guided the decision-making process, and everyone knew it without having to be told. The credo stated that the priorities, in order, were:
- To the consumers
- To the employees
- To the communities being served
- To the stockholder
When the crisis had ended, Burke recalled that no meeting had been convened for the first critical decision: to be open with the press and put the consumer’s interest first. “Every one of us knew what we had to do,” Mr. Burke commented. “There was no need to meet. We had the credo philosophy to guide us.”
The solution was new packaging. Tylenol capsules were reintroduced in November in triple-seal, tamper-resistant packaging, with the new packages beginning to appear on retail shelves in December. Despite the unsettled conditions at McNeil caused by the withdrawal of the Tylenol capsules in October, the company, with its new triple-sealed package, was the first in the industry to respond to the national mandate for tamper-resistant packaging and the new regulations from the Food and Drug Administration.
By Christmas week 1982, Tylenol had recovered 67 percent of its original market share. The product was coming back faster and stronger than the company had anticipated.
After the tampering in the Chicago area in the fall of 1982, the over-the-counter medications and the packaging industries examined a broad range of technologies designed to protect the consumer against product tamperings. Johnson & Johnson conducted an exhaustive review of virtually every viable technology. Ultimately, for Tylenol capsules they selected a triple safety sealed system that consisted of glued flaps on the outer box, a tight printed plastic seal over the cap and neck of the bottle, and a strong foil seal over the mouth of the bottle.
The decision to reintroduce capsules was based on marketing research done during that time. This research indicated that the capsules remained the dosage form of choice for many consumers. Many felt it was easier to swallow, and some felt that it provided more potent pain relief. While there was no basis in fact for the latter perception—tablets, caplets, and capsules are all equally effective—it was not an irrelevant consideration. “To the extent that some people think a pain reliever may be more powerful, a better result can often be achieved,” said Burke. “This is due to a placebo effect but is nonetheless beneficial to the consumer.”
Given these findings and Johnson & Johnson’s confidence in the new tripleseal packaging system, the decision was made to reintroduce Extra-Strength Tylenol pain relievers in capsule form.
Four Years Later: Second Tylenol Poisonings
On Monday afternoon, February 10, 1986, Johnson & Johnson was informed that Diane Elsroth, a young woman in Westchester County, New York, died of cyanide poisoning after ingesting Extra-Strength Tylenol capsules. Johnson & Johnson immediately sent representatives to Yonkers to attempt to learn more and to assist in the investigation. Johnson & Johnson also began conferring by telephone with the FDA and the FBI, both in Washington and at the respective field offices.
Johnson & Johnson endorsed the recommendation of the FDA and local authorities that people in the Bronxville/Yonkers, New York, area not take any of these capsules until the investigation was completed. Although from the outset Johnson & Johnson had no reason to believe that this was more than an isolated event, Johnson & Johnson concurred with the FDA recommendation that nationally no one take any capsules from the affected lot number ADF 916 until further notice. The consumers were asked to return products from this lot for credit or exchange. The tainted bottle was part of a batch of 200,000 packages shipped to retailers during the previous August, 95 percent of which had already been sold to consumers. Johnson & Johnson believed other people would have reported problems months before if the batch had been tainted either at the manufacturing plant or at distribution sites.
Once again Johnson & Johnson made its CEO, James Burke, its lead spokesperson. And once again the media treated Johnson & Johnson fairly because of the openness and availability of James Burke and other Johnson & Johnson personnel. Johnson & Johnson responded rapidly and honestly to all information requests by the media, a lesson remembered from the 1982 Tylenol tragedy.
WITHDRAWAL FROM THE DIRECT TO CONSUMER CAPSULE BUSINESS
Clearly, circumstances were different in 1986. In light of the Westchester events, Johnson & Johnson no longer believed that it could provide an adequate level of assurance of the safety of hollow capsule products sold direct to consumers. For this reason, the decision was made to go out of that business. “We take this action with great reluctance and a heavy heart,” Burke said in announcing the action. “But we cannot control random tampering with capsules after they leave our plant. Therefore, we feel our obligation to consumers is to remove capsules from the market to protect the public.” The company, Burke said, had “fought our way back” after the deaths of seven people who ingested cyanide-laced Tylenol capsules in 1982, and “we will do it again. We will encourage consumers to use either the solid tablets or caplets,” said Burke. “The caplet is especially well-suited to serve the needs of capsule users. It is oval-shaped like a capsule, 35 percent smaller and coated to facilitate swallowing. It is also hard like a tablet and thus extremely difficult to violate without leaving clearly visible signs. We developed this dosage form as an alternative to the capsule. Since its introduction in 1984, it has become the analgesic dosage form of choice for many consumers.”
“While this decision is a financial burden to us, it does not begin to compare to the loss suffered by the family and friends of Diane Elsroth,” Burke said, his voice quavering as he referred to the woman who died. He expressed, on behalf of the company, “our heartfelt sympathy to Diane’s family and loved ones.”
In abandoning the capsule business, Johnson & Johnson had taken the boldest option open to it in dealing with an attack on its prized Tylenol line. At the same time, the company used the publicity generated by the latest Tylenol scare as an opportunity to promote other forms of the drug, particularly its caplets. Johnson & Johnson initially balked at leaving the Tylenol capsule business, which represented about one-third of the $525 million in Tylenol sales in 1985. Mr. Burke said he was loath to take such a step, noting that if “we get out of the capsule business, others will get into it.” Also, he said, pulling the capsules would be a “victory for terrorism.”
People thought that the 1982 tampering incident meant an end to Tylenol. Now the same people believed that Tylenol would survive because it had demonstrated once that it could do so. If survival would be in caplets, then the industry would Withdrawal from the Direct to Consumer Capsule Business
eventually follow. The FDA was planning to meet with industry officials to discuss what technological changes might be necessary to respond effectively to this problem. At stake was a reexamination of over-the-counter capsules that included dozens of products ranging from Contac decongestant to Dexatrim diet formula.
During congressional testimony, Burke said, “I have been deeply impressed by the commitment and performance of government agencies, especially the FDA and the FBI. I cannot imagine how any organizations could have been more professional, more energetic or more rational in exercising their responsibilities to the American public.
In addition, the media performed a critical role in telling the public what it needed to know in order to provide for its own protection. In the vast majority of instances, this was accomplished in a timely and accurate fashion. Within the first week following the Westchester incidents, polling revealed nearly 100 percent of consumers in the New York area were aware of the problem. I believe this is an example of how a responsible press can serve the public well-being.”
Accolades and Support
Once again, Johnson & Johnson received high marks, this time for the way it handled the second Tylenol tragedy. This was evident from the remarks of Mr. Simonds, McNeil’s vice president of marketing. “There’s a real unity of purpose and positive attitude here at McNeil. Any reservations people had about the effect of removing capsules from the company’s product line are long since resolved. We realized there was no good alternative” to the action announced by Johnson & Johnson Chairman James E. Burke, he said, “as we simply could not guarantee the safety of the capsule form.”
As in the aftermath of the 1982 tragedies, Mr. Simonds added, “everybody at McNeil pulled together.” More than 300 McNeil employees manned the consumer phone lines, with four of them even fielding calls in Spanish.
The employees were buoyed by unsolicited testimonials from consumers. One man in Savannah, Georgia, wrote Mr. Burke, “You and your people deserve the right to walk with pride!” Members of a fifth-grade class in Manchester, Missouri, wrote that they “will continue to support and buy your products.”
Many of the correspondents did not know what they could do to help but clearly wanted to do something. A man in Yonkers, New York (near where the tampering occurred), for example, wrote, ”In my small way I am donating a check in the amount of $10 to offset some of the cost of this kind of terrorism. I would like to donate it in the names of my two children, Candice and Jennifer. Now it (the capsule recall and discontinuation) will only cost Johnson & Johnson $149,999,990.” (The check was returned with thanks.)
Nor were the testimonials and words of thanks just from consumers. The New York Times said that in dealing with a public crisis “in a forthright way and with his decision to stop selling Tylenol in capsule form, Mr. Burke is receiving praise from analysts, marketing experts and from consumers themselves.”
The Cleveland Plain Dealer said, “The decision to withdraw all over-thecounter capsule medications, in the face of growing public concern about the vulnerability of such products, was sadly but wisely arrived at.”
The magazine U.S. News and World Report wrote, “No company likes bad news, and too few prepare for it. For dealing with the unexpected, they could take lessons from Johnson & Johnson.”
And columnist Tom Blackburn in the Miami News put it this way: “Johnson & Johnson is in business to make money. It has done that very well. But when the going gets tough, the corporation gets human, and that makes it something special in the bloodless business world.”
Perhaps most significantly, President Reagan, opening a meeting of the Business Council (comprised of corporate chief executives) in Washington, D.C., said, ”Let me congratulate one of your members, someone who in recent days has lived up to the highest ideals of corporate responsibility and grace under pressure. Jim Burke of Johnson & Johnson, you have our deepest admiration.”
That kind of support from many sources has spurred McNeil, and the results are evident. “There is absolutely no doubt about it. We’re coming back—again!”5
- On crisis projects, the (executive) project sponsor will be more actively involved and may end up performing as the project manager as well.
- The project sponsor should function as the corporate spokesperson, responsible for all crisis communications. Strong communication skills are therefore mandatory.
- Open and honest communications are essential.
- The company must display a social consciousness as well as a sincere concern for people, especially victims and their families.
- Managing stakeholders with competing demands is essential.
- The company, and especially the project sponsor, must maintain a close working relationship with the media.
- A crisis committee should be formed and composed of the senior-most levels of management.
- Corporate credos can shorten the response time during a crisis.
- The company must be willing to seek help from all stakeholders and possibly also government agencies.
- Corporate social responsibility must be a much higher prioritythan corporate profitability.
- The company, specifically the project sponsor, must appear atthe scene of the crisis and demonstrate a sincere compassion for the families of those injured.
- The company must try to prevent a bad situation from gettingworse.
- The company must manage the crisis as though all informationis public knowledge.
- The company must act quickly and with sincerity.
- The company must assume responsibility for its products andservices and its involvement in the crisis.
5“Tylenol Begins Making a Solid Recovery,” in Worldwide, Johnson & Johnson Corporate Public Relations, 1986.
VICTIMS AND VILLAINS
The court of public opinion usually casts the deciding ballot as to whether the company involved in the crisis should be treated as a victim or a villain in the way it handled the crisis. The two determining factors are most often the company’s demonstration of corporate social responsibility during the crisis and how well it dealt with the media.
During the Tylenol poisoning, Johnson & Johnson’s openness with the media, willingness to accept full responsibility for its products, and rapid response to the crisis irrespective of the cost were certainly viewed favorably by the general public. Johnson & Johnson was viewed as a victim of the crisis. Nestlé, on the other hand, was viewed as a villain despite the company’s belief that it was doing good for humanity by marketing the infant formula.
Exhibit I shows how the general public viewed the company’s performance during the crisis. The longer the crisis lasts, the greater the tendency that the company will be portrayed as a villain.
Exhibit I. Public opinion view of crisis management
Public Opinion View
Nestlé and the infant formula
Columbia reentry disaster
Exxon Valdez oil spill
Russian submarine Kursk
Ford and Firestone
Concorde: Air France
Concorde: British Airways
Intel and Pentium
Crises can be shown to go through the life cycles illustrated in Exhibit II. Unlike traditional project management life-cycle phases, each of these phases can be measured in hours or days rather than months. Unsuccessful management of any of these phases could lead to a corporate disaster.
Most crises are preceded by early-warning signs or risk triggers indicating that a crisis may occur. This is the early-warning phase. Typical warning signals might include violations of safety protocols during technology development, warnings from government agencies, public discontent, complaints from customers, and warnings/concerns from lower-level employees.
Most companies are poor at risk management, especially at evaluation of early-warning signs. Intel, the Nestlé case, and the Shuttle disasters were exam-
Exhibit II. Crisis management life-cycle phases
ples of this. Today, project managers are trained in the concepts of risk management, but specifically related to the management of the project, or with the development of the product. Once the product is commercialized, the most serious early-warning indicators can appear and, by that time, the project manager may be reassigned to another project. Someone else must then evaluate the early-warning signs.
Early-warning signs are indicators of potential risks. Time and money are a necessity for evaluation of these indicators, which preclude the ability to evaluate all risks. Therefore, companies must be selective in the risks they consider.
The next life-cycle phase is understanding the problem causing the crisis. For example, during the Tylenol poisonings, once the deaths were related to the Tylenol capsules, the first concern was to discover whether the capsules were contaminated during the manufacturing process (i.e., an inside job) or during distribution and sales (i.e., an outside job). Without a fact-based understanding of the crisis, the media can formulate their own cause of the problem and pressure the company to follow the wrong path.
The third life-cycle phase is the damage assessment phase. The magnitude of the damage will usually determine the method of resolution. Underestimating the magnitude of the damage and procrastination can cause the problem to escalate to a point where the cost of correcting the problem can grow by orders of magnitude. Intel found this out the hard way.
The crisis resolution stage is where the company announces its approach to resolve the crisis. The way the public views the company’s handling of the crisis has the potential to make or break the company.
The final stage, lessons learned, mandates that companies learn not only from their own crises but also from how others handled crises. Learning from the mistakes of others is better than learning from one’s own mistakes.
Perhaps the most critical component in Exhibit I is stakeholder communications. When a crisis occurs, the assigned project manager may need to communicate with stakeholders that previously were of minor importance, such as the media and government agencies, all of whom may have competing interests. These competing interests mandate that the project managers understand stakeholder needs and objectives and also possess strong communication skills, conflict resolution skills, and negotiation skills.
- When a crisis project occurs, who should be the leader of the crisis team?
- Will there be a crisis committee or a crisis project sponsor?
- How important is effective communication during a crisis?
- How important is stakeholder relations management during a crisis?
- Should a company immediately assume responsibility for a crisis?
- How important is response time when a crisis occurs?
- How important is it to show compassion for people that may have been injured?
- How important is it to maintain a paperwork trail?
- How important is it to capture lessons learned?
Is It Fraud?
Paul was a project management consultant and often helped the Judge Advocate General’s Office (JAG) by acting as an expert witness in lawsuits filed by the U.S. government against defense contractors. While most lawsuits were based upon unacceptable performance by the contractors, this lawsuit was different; it was based upon supposedly superior performance.
MEETING WITH COLONEL JENSEN
Paul sat in the office of Army Colonel Jensen listening to the colonel’s description of the history behind this contract. Colonel Jensen stated:
We have been working with the Welton Company for almost ten years. This contract was one of several contracts we have had with them over the years. It was a one year contract to produce 1500 units for the Department of the Navy. Welton told us during contract negotiations that they needed two quarters to develop their manufacturing plans and conduct procurement. They would then ship the Navy 750 units at the end of the third quarter and the remaining 750 units at the end of the fourth quarter. On some other contracts, manufacturing planning and procurement was done in less than one quarter.
On other contracts similar to this one, the Navy would negotiate a firmfixed-price contract because the risk to both the buyer and seller was quite low. The Government’s proposal statement of work also stated that this would be a firm-fixed-price contract. But during final contract negotiations, Welton became adamant in wanting this contract to be an incentive-type contract with a bonus for coming in under budget and/or ahead of schedule.
We were somewhat perplexed about why they wanted an incentive contract. Current economic conditions in the United States were poor during the time we did the bidding and companies like Welton were struggling to get government contracts and keep their people employed. Under these conditions, we believed that they would want to take as long as possible to finish the contract just to keep their people working.
Their request for an incentive contract made no sense to us, but we reluctantly agreed to it. We often change the type of contract based upon special circumstances. We issued a fixed-price-incentive-fee contract with a special incentive clause for a large bonus should they finish the work early and ship all 1500 units to the Navy. The target cost for the contract, including $10 million in procurement, was $35 million with a sharing ratio of 90%–10% and a profit target of $4 million. The point of total assumption was at a contract price of $43.5 million.
Welton claimed that they finished their procurement and manufacturing plans in the first quarter of the year. They shipped the Navy 750 units at the end of the second quarter and the remaining 750 units at the end of the third quarter. According to their invoices, which we audited, they spent $30 million in labor in the first nine months of the contract and $10 million in procurement. The Government issued them checks totaling $49.5 million. That included $43.5 million plus the incentive bonus of $6 million for early delivery of the units.
The JAG office believes that Welton took advantage of the Department of the Navy when [they] demanded and received a fixed-price-incentive-fee contract. We want you to look over their proposal and what they did on the contract and see if anything looks suspicious.
©2010 by Harold Kerzner. Reproduced by permission. All rights reserved.
The first thing that Paul did was to review the final costs on the contract.
Labor: $30,000.000 Material: $10,000,000
Welton completed the contract exactly at the contract price ceiling, also the point of total assumption, of $43.5 million.
The cost overrun of $5 million was entirely in labor. Welton originally expected to do the job in twelve months for $25 million in labor. That amounted to an average monthly labor expenditure of $2,083,333. But Welton actually spent $30 million in labor over nine months, which amounted to an average monthly labor cost of $3,333,333. Welton was spending about $1.25 million more per month than planned for during the first nine months. Welton explained that part of the labor overrun was due to overtime and using more people than anticipated.
It was pretty clear in Paul’s mind what Welton had done. Welton overspent the labor by $5 million and only $500,000 of the overrun was paid by Welton because of the sharing ratio. In addition, Welton received a $6 million bonus for early delivery. Simply stated, Welton received $6 million for a $500,000 investment.
Paul knew that believing this to be true was one thing, but being able to prove this in court would require more supporting information. Paul’s next step was to read the proposal that Welton submitted. On the bottom of the first page of the proposal was a paragraph entitled “Truth of Negotiations” which stated that everything in the proposal was the truth. The letter was signed by a senior officer at Welton.
Paul then began reading the management section of the proposal. In the management section, Welton bragged about previous contracts almost identical to this one with the Department of the Navy and other government organizations. Welton also stated that most of the people used on this contract had worked on the previous contracts. Paul found other statements in the proposal that implied that the manufacturing plans for this contract were similar to those of other contracts and Paul now wondered why two quarters were needed to develop the manufacturing plans for this project. Paul was now convinced that something was wrong.
- What information does Paul have to support his belief that something is wrong?
- Knowing that you are not an attorney, does it appear from a project management perspective that sufficient information exists for a possible lawsuit to recover all or part of the incentive bonus for early delivery?
- How do you think this case study ended? (It is a factual case and the author was the consultant.)
The Management Reserve
A project sponsor forces the project management to include a management reserve in the cost of a project. However, the project sponsor intends to use the management reserve for his own “pet” project and this creates problems for the project manager.
The Structural Engineering Department at Avcon, Inc. made a breakthrough in the development of a high-quality, low-weight composite material. Avcon believed that the new material could be manufactured inexpensively and Avcon’s clients would benefit by lowering their manufacturing and shipping costs.
News of the breakthrough spread through the industry. Avcon was asked by one of its most important clients to submit an unsolicited proposal for design, development, and testing of products for the client using the new material. Jane would be the project manager. She had worked with the client previously as the project manager on several other projects that were considered successes.
MEETING WITH TIM
Because of the relative newness of the technology, both Avcon and the client understood that this could not be a firm-fixed-price contract. They ultimately agreed to a cost-plus-incentive-fee contract type. However, the target costs still had to be determined.
Jane worked with all of the functional managers to determine what their efforts would be on this contract. The only unknown was the time and cost needed for structural testing. Structural testing would be done by the Structural Engineering Department, which was responsible for making the technical breakthrough.
Tim was head of the Structural Engineering Department. Jane set up a meeting to discuss the cost of testing on this project. During the meeting, Tim replied:
A full test matrix will cost about $100,000. I believe that we should price out the full test matrix and also include a management reserve of at least $100,000 should anything go wrong.
Jane was a little perplexed about adding in a management reserve. Time was usually right on the money on his estimates and Jane knew from previous experience that a full test matrix may not be needed. But Tim was the subject matter expert and Jane reluctantly agreed to include in the contract a management reserve of $100,000. As Jane was about to exit Tim’s office, Tim remarked:
Jane, I had requested to be your project sponsor on this effort and management has given me the ok. You and I will be working together on this effort. As such, I would like to see all of the cost figures before submitting the final bid to the client.
REVIEWING COST FIGURES
Jane had worked with Tim before but not in a situation where Tim would be the project sponsor. However, it was common on some contracts that lower and middle levels of management would assume the sponsorship role rather than having all sponsorship at the top of the organization. Jane met with Tim and showed him the following information, which would appear in the proposal:
- Sharing ratio: 90–10%
- Contract cost target: $800,000
- Contract profit target: $50,000
- Management reserve: $100,000
- Profit ceiling: $70,000
- Profit floor: $35,000
Tim looked at the numbers and Jane could see that he was somewhat unhappy. Tim then stated:
Jane, I do not want to identify to the client that we have a management reserve. Let’s place the management reserve in with the $800,000 and change the target cost to $900,000. I know that the cost baseline should not include the management reserve, but in this case I believe it is necessary to do so.
Jane knew that the cost baseline of a project does not include the management reserve, but there was nothing she could do; Tim was the sponsor and had the final say. Jane simply could not understand why Tim was trying to hide the management reserve.
Tim instructed Jane to include in the structural test matrix work package the entire management reserve of $100,000. Jane knew from previous experience that a full test matrix was not required and that the typical cost of this work package should be between $75,000 and $90,000. Establishing a work package of $200,000 meant that Tim had complete control over the management reserve and how it would be used.
Jane was now convinced that Tim had a hidden agenda. Unsure what to do next, Jane contacted a colleague in the Project Management Office. The colleague informed Jane that Tim had tried unsuccessfully to get some of his pet projects included in the portfolio of projects, but management refused to include any of Tim’s projects in the budget for the portfolio.
It was now clear what Tim was asking Jane to be part of and why Tim had requested to be the project sponsor. Tim was forcing Jane to violate PMI®’s Code of Ethics and Professional Conduct.
- Why did Tim want to add in a management reserve?
- Why did Tim want to become the project sponsor?
- Are Tim’s actions a violation of the Code of Ethics and Professional Conduct?
- If Jane follows Tim instructions, is Jane also in violation of the Code of Ethics and Professional Responsibility?
- What are Jane’s options if she decides not to follow Tim’s instructions?
For additional information on the Tylenol crises, see H. Kerzner, Project Management Case Studies, The Tylenol Tragedies, 2nd ed., Wiley, Hoboken, NJ, 2006, pp. 487–514; also “The Fight to Save Tylenol,” Fortune, November 29, 1982.
This section is adapted from J. E. Burke’s speech presented to the U.S. Senate Committee on Labor and Human Resources, February 28,1986.