Headstart. (product defects, technology acquisitions, Canadian software industry, CD-ROM technology and annual meetings)

Can a Product Defect Work for You?

You have invested a lot in developing your brand in the minds of your consumers. But, because brand equity is founded in your customers' perceptions, you know how fragile this valuable asset is. Today's products are increasingly complex and must be produced under heightened safety regulations. You fear the impact of an instance when your product is found defective or even dangerous. Such product-harm crises can have irrecoverable effects on customers' loyalty and their perceptions of your product's quality - your investments in brand equity.

Recent research by Ivey Business School professor, Niraj Dawar, and Madan Pillutla of the Hong Kong University of Science and Technology, may be cause for relief for many brand managers. Their research suggests that your response to a crisis combined with the reputation your firm enjoyed before the crisis can help you turn a threat into an opportunity. Take for example, the Tylenol capsule-poisoning incident in the early 1980s. Tylenol emerged stronger from the incident thanks to its impeccable reputation and exemplary response to the crisis. Dawar and Pillutla set out to test the impact of two variables on brand equity:

1. A Firm's Response: Customers should see no ambiguity in a firm's response to a crisis. In a product-harm crisis, an ambiguous response would include one that suggested different levels of support by the firm for its brand. The information provided by the firm would leave customers open to a variety of interpretations. For example, a firm may admit to problems with a product, but not recall the product because it sees this as too drastic or expensive.

2. Reputation: Based on a company's past behavior, customers develop a belief about the firm's reputation that is, in turn, used by the consumer to predict the firm's future behavior. According to the authors, "the firm's reputation for customer-friendliness, for example, may affect consumers' expectations about replacement of defective products, and more generally, about responsible behavior in a product-harm crisis."

Using a fictitious soft drink, the researchers first lead participants through a fabricated product crisis in another city and then a launch of the same product in the participant's city. Varying the firm's response to the crisis and its pre-crisis reputation, Dawar and Pillutla measure what happens to brand equity.

They find that reputation may moderate the impact of firm response on brand equity. "A prior, customer-friendly reputation appears to provide at least a 'buffer' and potentially a springboard for brand equity in times of crisis. On the other hand . . . a firm with no prior reputation may at best be able to preserve its brand equity in a crisis by responding unambiguously to support the brand."