Full Article

March 3, 2014

The Impact of Product Recalls on the Automobile Industry

University of Nebraska–Lincoln Assistant Professor of Marketing Meike Eilert and colleagues examine the role of product recalls as a catalyst to stimulate organizational learning. While product recalls are frequent, some firms have questioned the merits of product recalls. To assess the value of product recalls, the authors study whether and when product recalls result in a reduction of future accidents and recalls.

Product failures provide an opportunity for firms to learn and make improvements in their current products. Analyzing 459 make/year observations involving 27 automobile makers between 1995 and 2011, the authors find product recalls can indeed impact organizational learning. The study shows product recalls lead to improvements in product reliability which subsequently reduces the number of accidents and recalls in the future. However, not all firms learn equally well from product recalls.

“Although the goal of a product recall program is to enhance safety, little is known about whether firms learn from product recalls,” Eilert said. “This study tests the direct effect of product recalls on future accidents and future recall frequency and their indirect effect through future product reliability in the automobile industry.”

Eilert and her colleagues discover learning is more likely to occur for firms that share manufacturing plants, suppliers and components across products in their portfolio. This finding is particularly relevant as some have raised the concern that such lean manufacturing practices could be responsible for the high number of recalls in the automotive industry. The evidence from this study does not support this speculation – in contrast, it suggests firms that share assets are able to improve reliability to a greater extent after product recalls.

Interestingly, this study also finds learning is more likely to occur for brands of lower quality than for higher quality. While lower quality brands appear to be motivated to learn and improve reliability after a recall, higher quality brands are less responsive to recalls, possibly due to viewing recalls as aberrations or as the result of factors beyond the firm’s control.

This research enhances the understanding of the value that product recalls provide to firms and public safety in general. The findings do not imply firms should engage in more recalls than what is already witnessed in the marketplace. Firms should perform careful pre-market screening of products which is not much of a priority for firms as they have the desire to grow rapidly. Growth and product quality are rarely lock-in-step. The value of product recalls lie in curbing a company's desire to grow at the expense of quality.

The study was published in the Journal of Marketing in 2013. Coauthors of this study include Kartik Kalaignanam of the University of South Carolina and Tarun Kushwaha of the University of North Carolina.

Research abstract located at: http://journals.ama.org/doi/abs/10.1509/jm.11.0356