Michael Willard, writer, painter, columnist, entrepreneur
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Dancing With the Bear: Crisis Management in Eastern Europe

Crisis: AS Certain as Death and Taxes

Crises are inevitable. The headquarters CEO or the in-country manager who does not believe this is an executive in denial, and his immediate future might portend an unexpected career change.

It is not a question of "if" a crisis will occur, but "when" and what will be its severity. Bad things do happen to good people, and in the former Soviet Union, they happen more often.

Will it be a worst case scenario, or will it be a best case development? Will it be a daylong phenomenon or will it be a yearlong nightmare?

Will your company respond confidently, having prepared for most contingencies, or will it somehow manage to step on each and every landmine in the field?

In short, are you a crisis prepared company? Or, are you a crisis prone company? Not to be overly dramatic, but these are important life and death reputation questions.

Careers are often launched or lost on the turn of a crisis. In a previous decade, the fallen titans who led Exxon and Union Carbide must wonder how the history books might read if only they had shown a modicum of ability in handling two of the most infamous corporate crises of all time: The Exxon Valdez oil spill and the killer chemical leak in Bhopal, India.

On the other hand, corporate leaders at Johnson & Johnson (Tylenol product tampering), Pepsi Cola (syringe product tampering) and Coca-Cola (introduction of "new" Coke) gained in reputations by maneuvering skillfully through crises. They realized the importance of their organizations in the global community, that news occurs every second and that the ability to respond forthrightly was not only right but expected.

Most counselors would argue that crises are inevitable in any business and in any market, whether it's a small tool and die shop in Cut-And-Shoot, Texas, or a multi-national food company with plants in St. Petersburg, Minsk or Kyiv. This is true. Crises do not discriminate.

This book, however, seeks to examine the riskier markets, realizing that some crises are more endemic to volatile emerging countries.

During the span of one year in Moscow, the following high profile crises occurred:

  • American employees of a major communications client were arrested and charged with spying.
  • A major European bottling plant had a product contamination scare.
  • A local general manager attempted to take over the foreign company for which he had worked, employing security guards with automatic weapons to keep out the rightful owners.
  • A newspaper reporter attempted to extort favors from a French company by claiming his son had become ill after tasting the company's dairy product.
  • A meltdown in the economy with a 75 per cent devaluation of the Russia ruble impacted the ability of virtually all western firms to do business in the country.

There are certain inherent dangers in various emerging markets – whether its Eastern Europe, Central Asia, the Far East, or Latin America – that are not found in the more mature markets. While companies in all countries entertain unwanted problems, emerging markets have peculiarities that make them even more vulnerable to crises.

  • Often there is the absence of "the rule of law." A court system might be bias through outside influence. The judiciary could be intimidated by the possible prospect of assassination or kidnapping.
  • The integrity of a free press is often compromised as competitors purchase stories to discredit other competitors.
  • Even if a company's adheres strictly to tax laws, a competitor with political influence can cause a nightmare by suggesting to the authorities that your company is not compliant.
  • The bureaucracy is more prone to competitor bribes and other mischief. This often extends to top government officials.
  • In the former Soviet countries, a widespread so-called Mafia developed after the fall of Communism.
  • An erratic economy can cause devaluation of currency, causing huge losses in a 24-hour period.

So, why would anyone want to do business in these places? Many have weighed the risk and have decided it simply isn't worth it. They folded their corporate tents and sought more secure harbors.

Various multi-national companies cut their losses in Eastern Europe, primarily Russia, after the economic meltdown of August, 1998. A wave of violence and apartment house bombings gave others reason to pause in the summer of 1999. For the second time in five years, just prior to the millenium, Russia was again at war with Chechnya.

However, the draw that enticed corporate boardrooms to make investments in Eastern Europe a decade ago is the same lure today, only there is a more realistic attitude. [1] In Russia and Ukraine alone, there are a hefty 200 million consumers. Together the two countries have a huge industrial base, a substantial endowment of natural resources (a fourth of the world's black soil is in Ukraine) and an educated public. It is, in short, a collection of people who smoke cigarettes, enjoy candy and soda pop and clean their bathrooms. If offered a competitive and quality western product, there is a good chance they will buy it. The majority of companies, rightly so, continue to believe in the hope and the promise of the former Soviet countries.

In Eastern Europe there is a saying: If you want to do business here, you better be prepared "to dance with the bear." Quite often, however, due to legal, ethical and cultural misgivings (such as the Corrupt Foreign Practices Act in the U.S.), one dances at one's peril. The bear is rather clumsy, often taking three steps to do the basic two step.

From the outset, it should be stated that the company that abandons its core values to do business in emerging markets is on the most slippery of slopes. In the end, that company will lose the respect of its hosts and its reputation at home. Quite possibly, people will lose jobs, even face legal difficulties.

This is not Pollyanna. We watched companies large and small "adjust" their ethics to the "realities" of Moscow or Kyiv, only to find the shining pot at the end of the rainbow turn to fools' gold. The largest risk, the one that will precipitate a crisis in your company, is to play by someone else's wayward rules

An entrepreneurial acquaintance in Kyiv opened a theme bar in that city. Because it was a little bit of Americana off Khreshatic, the city's central business section, the chances were good it would be a success with the expatriate crowd. To "insure" success, the American partner threw in with a Mafia outfit for protection. This is the way you do business here, he boasted. Before long, the thugs had taken over the business. The acquaintance realized this when he asked the barmaid for a beer in what had been his establishment, and she made him pay for it. It was time for this entrepreneur to leave the country, and he immediately did so.

In emerging markets, the margin for error is minimal. As yet, profits for most companies have not been sustainable with economies in 1998 becoming awash in sinking currencies. One niche area of crisis management became keeping the faith with the gray suits back home, the executives who commute in from Scarsdale to sit on the board meetings. Shareholders like predictability. They fear the unknown. These are the days when stock markets tick upward on news that a company is laying off thousands to economize. It is reasonable to assume, after several difficult years, that the closure of risky offices might also send a stock momentarily upward.

I have worked in emerging markets for a half dozen years, primarily in Moscow, where I was a managing director for the worldwide perception management company Burson-Marsteller; and in Kyiv, where I started B-M's Ukraine office and where today is located the headquarters of The Willard Group, a knowledge firm. Obviously, as a US citizen, I would not have invested a substantial portion of my life in Russia and Ukraine if I did not have confidence in maneuvering the many pitfalls inherent in working in an emerging market. This is the primary reason for writing this book, to demonstrate to others that with sound crisis management and reputation enhancement decisions, businesses—particularly in the long run—can grow and thrive.

The theme of this book is crisis and reputation management in risky markets. We have linked the two because they are inseparable in building the case for and in implementing a crisis identification, management, and recovery program. A crisis not managed in a competent and resourceful manner can lead to diminished or ruined reputations of people and of companies. On the other hand, particularly in emerging markets, the exploration of potential crises, and even the professional management of a real crisis, can lead to reputation enhancement opportunities. An ability to function well during a crisis separates the heroes from the corporate goats.

While this book will outline traditional methods of crisis management, the focus will be on markets that, in the current global view, are considered risky countries for doing business. As such, some of the methods detailed will be unique to most East European and Central Asian markets. The former Soviet Union gave birth to a particular culture. To some extent, particularly in the Baltic states, government and business have been able to shelve some of society's least desirable practices over a relatively short time span. This is slightly less true in Central Europe, though the outside perception is that The Czech Republic, Poland and Hungary are miles ahead of Russia, Ukraine and the Central Asian republics in this regard. The result has been a loss of foreign investment.

Major companies promoting major brands, however, show no signs of giving up in Eastern Europe. Unilever, Coca-Cola, Philip Morris, Danone, Kraft Foods are, in fact, expanding their reach and introducing new brands. Obviously, they believe the rewards out weigh the risks. [2] Or, perhaps, to slightly paraphrase Woody Allen, "90 per cent of success is showing up."

Say It Ain't So, Joe

There is often denial on the part of company executives. They know their company is at risk for a crisis, but they rationalize:

  • We know the market; we can handle it.
  • Our company crisis team is in place at headquarters. We know where to call.
  • Crisis management cost too much.
  • There is no way to plan for all types of crises, so why try.
  • We've never had a crisis before, why fix something that's not broken.
  • We're too busy doing our job. We can't afford to take the time to prepare for something that might never happen.

And the list goes on, and on, and on.

Crises in emerging markets tend to grow like mushrooms. A quick glance at a recent edition of the Kyiv Post shows the following headlines:

  • Scandal Shakes Eurasia Foundation: Ukraine is the third largest recipient of US aid. Any scandal has the potential for impacting all programs sponsored by the United States Agency for International Development (USAID).
  • Y2K Worry Escalating in Ukraine: By the time this book is published, we will know the damage, if any, caused by the so-called millennium bug in emerging markets. At this writing, however, it was a crisis in the making.
  • President's Rivals Fear Vote Rigging: Election results in emerging markets nearly always have more of an impact on corporate business than in Western markets.
  • Russian Officials to Join Money-Laundering Probe: A money-laundering scandal involving the Bank of New York has caused treasury officials to take a closer look at all transactions from East European markets.

Have you ever heard a slight "ping" in your car and ignored it. Then, a few weeks later, the mechanic you take your car to after it stalls in traffic tells you: "Wow, I don't think I have ever seen a connecting rod snap and do so much damage to an engine."

Crisis preparation is a rather inexpensive insurance policy for a situation that eventually will disrupt and could seriously harm your business. While there is no way to predict exact crisis, the preparedness and training for various categories of crises will be a tremendous benefit in managing most difficult situations.

Finally, ground zero of a crisis is where the action is. The dateline for the Bhopal disaster wasn't Connecticut. The EXXON Valdez oil spill didn't happen in New York City. Particularly in emerging markets, the crisis team should be at the center of the action, generally the city in which the crisis originated.

A Map To Somewhere – But Where

There is no yellow brick road to crisis resolution. While it must be a systematic approach, and while the tactics must be orderly and strategic, a crisis can take the appearance of an amorphous glob of silly putty. The warning signs one moment can be merely false smoke signals sent up by a crackpot. That which appears to be an obvious answer at a crisis outset, can seem a foolish approach as more information is known. It is usually in the early hours of a crisis that the most confusion occurs. Because of this, the crisis team must be able to jell as an intelligent strategic unit, and not appear as a squabbling, overly opinionated mob. We will delve more into the dynamics of the crisis team in future chapters.

There are five phases to a crisis:

1. Recognizing and identification: Generally in risky markets, the warning signals will be prevalent. In the beginning, it might be like reading tea leaves. Thorough detective work and quality intelligence gathering is a must. During the Watergate hearings of the 1970s, then Sen. Howard Baker of Tennessee asked the crucial question of witnesses: "What did you know and when did you know it". This has become the mantra of media seeking answers as to who are the heroes, villains, and victims in a crisis.

2.Solving the problem or taking steps to solve the problem. If life (human or animal) , property, the environment are threatened, this becomes the first priority in all crises. This goes in tandem with crisis communication, telling your various publics what you are doing about the situation in a confident and forthright manner.

3.Damage control. This is not a defensive action. An organization has the right and obligation to its various publics to aggressively put forth its case. In situations where blame clearly stems from the negligence of a company, this calls for honest apologies and clear strategies to make amends.

4. Recovery.  The smart company looks to turn a negative situation into a positive one for the future. The original crisis was the Biblical Adam and Eve partaking the forbidden fruit. A prompt admission, apology and opportunity were in order. Adam: "God, we're truly sorry. To show our sincerity, we have grand plans to plant millions of new apple trees, and, by the way, Eve and I sent the serpent packing."

5. Learning.  For crisis prepared companies, this final stage is automatic. A thorough de-briefing and analysis of the crisis is the most effective way of preparing for and possibly preventing the next crisis that's around the corner. This process includes gaining insights from all the company's constituencies, from the press to the shareholders.

Throughout these pages we will be discussing in detail the phases of crisis and providing insights into the overall management of crises in risky markets. As noted, there are both similarities and differences between approaches in mature markets and developing markets, primarily from the standpoint of market realities (a free press in its infancy, corruption in government, etc.). We have attempted not to duplicate other writings on the subject of crisis management except as to the overall attributes of any situation that can become a crisis.

The crisis examples in this book all have elements of situations that actually occurred, but do not follow that closely to the original script. Some of the stories have been enhanced to provide more complete examples. The names of clients, specific regional area of the crisis or potential crisis and non-necessary details, where it would identify the client, have been omitted.

Our hope is that the book will serve as a starting point for individuals and companies that see the potential as well as the risk in these emerging markets.

Random Notes Kyiv, Ukraine

December 1999

From reading the international press, one get the impression Ukraine is the equivalent of Hole-In-The-Wall, Butch Cassidy and the Sundance Kid's fabled outlaw hideout.

The talk is of a thiefdom, as opposed to a nation. I find it all rather wearisome. A nation being born is more of a crucible to rise up from, rather than the lullaby the fancy pants critics would wish.

Thinking back, I remember various spaghetti heads at numerous alphabet funding agencies moaning about the "lack of a political will." It's our way or the highway, they blustered—though meekly.

For some reason, there was this inexhaustible belief that test tube computer modules on market reform would have a nation joining hands and singing Kum-ba-ya. They thought nearly 50 million people obtaining privatization certificates in virtually bankrupt companies actually meant something.

The process was illusionary at best, delusional at worst.

We - meaning virtually all of us Western experts—tend to forget the breech births of our own nations. America had a revolution, and then it took a decade for a Continental Congress to get its act together.

Democracy is not shake and bake. It's not microwaveable.

Instead of Ukraine's cloak and dagger bumping off of an official or two now and then, America saw a former treasury secretary, Alexander Hamilton, and a sitting vice president, Aaron Burr, take to the dueling fields. They called it honor.

In context, one can not blithely talk about another nation's lack of "the rule of law" when slavery, for nearly the first 100 years, was the official law of the land in the United States.

[1] Though Proctor & Gamble experienced a 16 per cent unit drop in Central and Eastern Europe after the devaluation, earnings were in the double-digit range the previous year. 1999 Annual Report

[2] In October, 1999, Coca-Cola did reduce its work force in Moscow by 70 per cent due to the continuing economic crisis.

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