When brands suffer crises abroad, distance makes a difference

Bad things sometimes happen to brands.

In 2010, for example, some Chinese drywall manufacturers received unpleasant news when U.S. testing showed their products released unusually high amounts of hydrogen sulfide. In 2011, the European Commission fined Procter & Gamble and Unilever hundreds of millions of euros over anti-competitive pricing for laundry detergent. And in 2012, McDonald’s and Yum! Brands Inc. learned that chicken they sold might have been fed unapproved antibiotics and growth hormones by farmers.

As multinational companies turn to international sales for more of their revenue and growth, their risk of potential crises abroad grows.

Three researchers wondered how effective corporations were at responding to marketing crises outside their home countries, what the impact of those crises are and how companies might better manage them.

Existing research hasn’t considered the impact of marketing crises in other countries, nor has it looked at whether differences between home countries and other nations – “psychic distance” – affects how businesses respond.

These questions are explored by Jan-Benedict Steenkamp, Knox Massey Distinguished Professor of Marketing at UNC Kenan-Flagler; Tarun Kushwaha of George Mason University; and and Isaac Dinner, a former marketing professor at UNC Kenan-Flagler.  They share their findings in “Psychic Distance and Performance of MNCs during Marketing Crises” in the Journal of International Business Studies.

What they discovered helps resolve a paradox in existing theories about managing international business, and sheds light on what firms can do to minimize the impact of a marketing crisis abroad.

A collection of crises

To understand how companies manage international marketing crises, the researchers tapped a rich database of corporate crises maintained by the Swiss research firm RepRisk AG. They also collected financial and stock market data, and information on the countries involved. RepRisk monitors news outlets and other sources in more than a dozen languages and rates the severity of each crisis.

The researchers ended up with set of crises involving 664 marketing crises across 41 foreign countries. The marketing crises include:
• Unsafe and controversial business practices
• Misleading advertising
• Unethical marketing practices
• Price fixing
• Anti-competitive actions

The UNC Kenan-Flagler researchers also looked at the companies’ stock value surrounding the time the crisis was disclosed publicly, and used a benchmarked asset pricing model to calculate the impact of the crisis on shareholder value.

On average, the crises reduce stock value by 0.15 percent, a change that could translate into millions of dollars in lost wealth.

The professors also gathered data on the “psychic distance” between countries. They define psychic distance as a collection of differences between a company’s home country and the nation where the crisis occurred. These differences include:
• Language
• Dominant religions
• Social norms
• Industrial development levels
• Education levels
• Political and legal difference
• Geographic distance, including time zone change.

Paradox of psychic distance

In the international business literature there are two dominant, but contrasting, views on how psychic distance affects companies’ management of crises outside their home country.

One view, the Uppsala School – based on research first pioneered at a Swedish university in the 1970s – holds that as psychic distance grows, firms will face greater challenges responding to them and thus larger losses in shareholder value. For example, a U.S. firm operating in China could face greater difficulty responding to a crisis there than it would in a more similar country, like Canada.

However, a second stream of more recent research proposes that companies might be too complacent in markets that are psychically close and will thus try harder in markets that are more distant.

There is empirical research supporting the theories, creating a paradox for company executives: Should they be more concerned about psychically distant countries or psychically close nations?

The researchers found a surprising answer: Both.

When they examined the impact of marketing crises through the lens of psychic distance, they found it followed a U-shaped curve. Crises in very close and very distant countries both had a greater impact than crises in countries falling between those extremes of psychic distance. The finding surprised the researchers, but it also resolves the paradox created by prior research.

How to handle crises better

The finding also raises an important question for executives at multinational firms: What do they need to do to better manage crises outside their home countries?

One important variable examined was the firms’ marketing capabilities. The basic question they wanted to answer was this: Did firms with greater marketing capabilities respond to crises in other nations more effectively, as measured by the impact on a company’s stock value?

The answer is yes. But that doesn’t mean companies should just throw more money at marketing. Rather, Kushwaha says, companies need to improve their capabilities. That might involve spending more, but only if the money is spent in the right way.

The researchers suggest four ways multinationals could strengthen their marketing capabilities.

1. View marketing as a strategic investment, rather than an expense.

2. Diagnose and benchmark your firm’s marketing capabilities against peers. Where does the company fall short compared to industry leaders?

3. Target the capabilities that are likely to have the greatest impact or are most important in beating competitors.

4. Develop institutional procedures and routines, and an organizational culture, around these marketing capabilities.

In addition to purely marketing-related steps, firms also could experiment with global, virtual teams and work to increase nationality diversity in their top management roles to better understand the risks of operating in other countries.