Learning from Conformance Quality Failures That Triggered Product Recalls : The Role of Direct and Indirect Experience

A product recall is an observable external quality failure and a source of significant potential loss to firms as well as a threat to public safety. While such failures can be a motivation for organizational learning, little is known about the extent to which recalls can be a source of learning experience. Using econometric modeling, we investigate to what extent firms learn from conformance quality failures using a panel sample of United States food product recalls conducted by 125 publically traded firms between 2004 and 2013. We differentiate between direct (i.e., internal locus of failure) and indirect (i.e., supplier locus of failure and industry recalls) sources of experience and examine the main and interaction effects on the likelihood of future recalls. The results indicate that experience derived from internal and supplier failures reduces the potential for future recalls, while industry recalls have no significant main effect. We also find evidence of substitution effects between internal and supplier failures, suggesting that there are diminishing learning effects at higher levels of both of these types of failures. This finding suggests that the variety and volume of information as well as uncertainty regarding outcomes can overwhelm firm information processing capabilities at higher levels of these failure types and that additional resources should be allocated to encourage adequate learning. Finally, internal failures and industry recalls act as learning complements, which may indicate that internal quality failures become more relevant when industry peers also experience quality failures