Commentary From Crisis Management Expert Edward Segal, Author of the Award- Winning Book "Crisis Ahead: 101 Ways to Prepare for and Bounce Back from Disasters, Scandals, and Other Emergencies " (Nicholas Brealey)

Peloton appears to be following the first of what I call the Four Laws Of Holes for managing a crisis.

The First Law Of Holes

The first law should be common sense for all business leaders: When you find yourself in a hole, stop digging.

According to Business Insider,  the exercise equipment manufacturer laid off almost 3,000 employees. "Peloton's job cuts amount to some 20% of its 14,000-strong corporate workforce. The cuts are expected to contribute to savings of at least $800 million a year, the company said in its news release. It's also winding down the building of a $400 million factory in Ohio where it had planned to produce bikes and treadmills."

The Second Law Of Holes

But Peloton is not yet following the Second Law Of Holes: Don't do anything that will make the crisis worse.

Business Insider noted that the salaries of company instructors will remain the same.

"Peloton's instructors— recruited by talent agents—are full-time employees with a fixed salary and incentive compensation... Senior instructors are paid more than $500,000 a year, Bloomberg reported, citing people familiar with the company. That's about 12 times more than the $40,510 annual median salary for fitness trainers and instructors, according to the Bureau of Labor Statistics."

The Third Law Of Holes

The third law is to climb out of the hole as soon as possible.

The AP reported that, "John Foley [who] first pitched the idea for Peloton in 2011...will give up the CEO position and become executive chair at Peloton Interactive Inc. Barry McCarthy, who served as CFO at Spotify as well as at Netflix, will take over as CEO, the company said Tuesday"

"'The problem for Peloton isn't that it has a bad product. Nor is it that there is no demand for what it sells," said Neil Saunders, managing director of Global Data Retail in a note published Tuesday. 'The central problem is one of hubris and bad judgment. Peloton incorrectly assumed that the demand created by the pandemic would continue to curve upward.'"

"In a conference call with analysts on Tuesday, Foley acknowledged that the company expanded its operations too quickly and over-invested in certain areas of the business.

"We own it. I own it, and we are holding ourselves accountable," said Foley, noting he will be working closely with the new CEO. "That starts today."

Maximize Assets

Stacy Rosenberg is an associate teaching professor at Carnegie Mellon University's Heinz College. She noted that Peloton's most visible assets "are their highly popular instructors. Maximizing the social media influence these instructors have on perceptions about the strength of the company would be a strategic way to reenergize the Peloton brand."

Problems Tied To Market Demand And Values

Robert C. Bird is a professor of business law at the University of Connecticut's School of Business. He said that, "Peloton's problems are tied to market demand, but they are also tied to values. Any company no matter how popular or how rapidly it grows, must not lose touch with its core ethical values. Such values cannot be generated overnight, but must permeate through the organization via a culture of integrity. That way when a crises appears suddenly, a company like Peloton can respond organically and with authenticity.

"Peloton didn't do that when the Consumer Product Safety Commission (CPSC) reported a number of serious accidents with its treadmill. It's first instinct was to dispute the information and respond defensively. That does not reassure consumers or investors. Instead of resisting public accusations, it should have offered to make amends immediately. Peloton didn't have the culture of integrity to do that, and now it is paying a heavy price," Bird commented.

The Fourth Law Of Holes

My Fourth Law Of Holes is simple: After you have climbed out of the hole, don't fall back in or dig yourself a new hole.

It is too early to tell, of course, if Peloton will be able to climb out of their hole—or avoid falling back in it.

'Peloton's Future Is At Risk'

Ahren Tiller is the founder and supervising attorney at the Bankruptcy Law Center. He said that "Yesterday's announcement is clearly an indicator that Peloton's future is at risk. Peloton is one of those [companies who saw] glory during the pandemic. But because of some miscalculations and wrong decisions, their triumph is now being replaced with an uncertain future. But if their new chief executive, Barry McCarthy, will play his cards right, he might still save the company from uncertainty."

Advice For Business Leaders

Take Ownership

Tiller observed that, "For me, there's only one crisis management lesson that business leaders must learn from these developments— that when something went wrong, taking ownership and responsibility will always be the right thing to do."

Positioning

Carnegie Mellon's Rosenberg pointed out that, "Restructuring is a normal part of business. Peloton, and other companies deciding to reduce their workforce, should position the news of layoffs as a step toward more efficient operations. Ultimately, as long as the customer experience does not suffer and their bottom-line improves, then they can present a restructuring as an opportunity not a shortfall.

Focus

"When announcing a change in leadership, the board should focus more on the potential success of the incoming C-suite talent than on the failings of the outgoing executive. Shareholders and consumers do not want the company to dwell on past mismanagement. It is more productive to highlight the company's strengths," she advised.

Avoid Traps

Margaret Hopkins is a professor of management at The University of Toledo's Neff College of Business and Innovation, which is located near where Peloton was going to build their first U.S. production facility.

She noted that there are three traps that leaders can fall into during crisis situations.

• "The first trap is to return to the leader's operational comfort zone and focus on managing the present as opposed to anticipating and taking a longer-term view."
• "A second trap is that leaders try to control all decisions and centralize the responses to the crisis."
• "The third trap is forgetting the human factors and focusing on the numbers of costs, revenues, and share prices. Crises affect people, and the numerical outcomes are the result of the coordinated work of people."

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