Thank you, Social Media : Why your competitors’ problems may soon become yours.

Johnson & Johnson’s crisis management surrounding the famous 1982 recall of 31 million bottles of Tylenol is probably the most famous product recall success story of the past decades. Business schools worldwide have touted the example, building a solid case for taking charge of PR disasters when bad luck hits.

Traditionally, a highly publicized blunder has been seen as a blessing for other firms sharing the marketspace. This traditional wisdom seemed true regardless of the issue at hand; a plane crash in the aviation industry, a smartphone exploding in the telecom business, or a political faux-pas by a presidency candidate, le bonheur des uns fait le malheur des autres.

It turns out, however, that in the face of a crisis, innocent brands should worry of their competitors’ mistakes. In fact they, too, may benefit from investing in a mitigation plan.

In a recent study in the journal of marketing research, researchers Borah and Tellis uncover the dark side of the halo effect for an industry. They focused on product recalls, measuring consumer sentiment over the course of 18 months.

The automative industry was ripe for study in 2014, as 64 millions cars had been recalled that year alone — a steep 300% increase from baseline years. Through tracking the Toyota, Honda Nissan, and Chrysler brands on social media, the researchers wanted to determine the effects of product callbacks, not only on the brands’ sentiment, but also on that of its competitors.

The damage is real; according to the initial research, ‘’ the social media multiplier of product recalls indicates significant negative impact on the sales and stock market performance of innocent brands (from the same country of origin). For example, […] one-unit shock in a recalled brand’s online chatter erodes about $7.3 million from the innocent rival brand’s average market capitalization over six days’’.

In a subsequent study, a Volkswagen recall widely covered by social media resulted not only in higher than normal return rates by consumers for the brand, but also in higher return rates for other European automobile brands around the same period — a real-life, real-world repercussion, spanning beyond the realm of the virtual world.

Image Credit : Dieselgate and the “perverse halo” of Volkswagen

Key take-away : If your competitor is facing a highly publicized crisis, be prepared to take a hit, too.


Originally published at https://www.linkedin.com on October 19, 2016.