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A Strategic Approach to Crisis Communions and Management

Professor Paul A. ArgentiThe Tuck School of BusinessMscom Excellence-in-Communications LectureOctober 2, 2006

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Introduction to Strategic CommunicationsThe changing business environmentUsing communications strategically Enhancing brand and reputationManaging risk and reputationCreating strategic alignment Communicating key values and measuring results

Key Takeaways

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The Changing Business EnvironmentA number of factors have affected the business landscape in recent years, increasing reputational risk.

Tumultuous business environment due to economic instability

Increased public scrutiny after exposure of corporate fraud in companies like WorldCom, Parmalat and ABB

Ever-decreasing public trust in corporations after exposure to actions of unscrupulous financial analysts, as in the case of Enron

Strengthened global communications channels due to improved technology

Growing cross-border mergers resulting from disintegrating national borders and liberalization of trade and finance

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Does Business Act Responsibly?

0% 25% 50% 75% 100%

1968 70%70%

1976 15%15%

1985 30%30%

1999 28%28%

2005 16%16%

Yankelovich & CNN/USA Today/ Gallup Poll

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“What matters is what the public thinks, and the public trust is what’s really crashed.”Pete Peterson, Chairman of Blackstone Group

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0% 25% 50% 75% 100%

Illegal CEO compensationbenefits

Questionable accounting 79%79%

Insider trading 68%68%

Source: CBSNEWS.com poll

Are these Business Practices Widespread?

69%69%

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When Communication MisleadsEnron misrepresents reality and its values

Vivendi Universal lies about earnings; CEO orders insider trading, negotiates himself €20m pay package

Arthur Andersen disregards regulators and clear signals

Parmalat misleads investors, while diverting cash into founder’s holdings

Elf executives misuse company funds to pay for political favors,luxury homes, mistresses, and jewelry

Royal Dutch / Shell falsifies oil reserves; plans to sink oil platform instead of using proper disposal methods

CEO Lord Conrad Black and colleagues receive unauthorized $85m into personal bank accounts from Hollinger International

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The Critics of Business64% say: “Giant companies are too big to give reliable

service to customers.”

65% say: “Even well-known, established companies cannot be trusted to make safe, durable products without government standards.”

67% say: “The quality of products from big companies has been slipping.”

88% say: “American business is too concerned with profit and not concerned enough with responsibilities to workers, consumers, and the environment.”

Source: Yankelovich Poll

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Trust in Institutions to Operate in Society’s Best Interests*

Armed forces +43%NGOs +27%Education system +26%Health system +17%Trade unions/labor +2%Legal system -2%Global companies -9%Large national companies -10%* Net rating = % trust - % distrust

Accenture The Business of Trust, World Economic Forum Voice of the People Forum

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Trust in Institutions to do What is Right

Europe:

• 57% NGOs

• 42% Business- 53% United Kingdom- 33% Germany- 28% France

• 33% Government

• 30% Media

Edelman Trust Barometer 2006, figures for Europe. Survey based on a 9-point scale where one denotes “Do not trust them at all” and nine denotes “trust them a great deal.”(top four boxes shown)

USA:

• 54% NGOs

• 49% Business

• 38% Government

• 30% Media

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Key Takeaways

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MessagesMessages

CorporationCorporation

ConstituentConstituent’’ssResponseResponse

ConstituenciesConstituencies

Corporate Communication Strategy Framework

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MessagesMessages

ConstituentConstituent’’s Responses Response

CorporationCorporation ConstituenciesConstituencies

What does the organization want each constituency to do?What resources are available?What is the organization’s reputation?

What is the best communication channel?How should the organization structure the message?

Who are the organization’s constituents?What their attitude about the organization?What is their attitude about the topic?

Did each constituency respond in the way the organization wished?Should the organization revise the message in light of the constituency responses?


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Choose an Appropriate Style

Low

High

HighAudience Involvement

Low

Content Control

TELLSELL

CONSULTJOIN

Source: Tannenbaum and Schmidt Model, Harvard Business Review

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MessagesMessages

ConstituentConstituent’’s Responses Response

CorporationCorporation ConstituenciesConstituencies

What is the best communication channel?How should the organization structure the message?

Who are the organization’s constituents?What their attitude about the organization?What is their attitude about the topic?

Did each constituency respond in the way the organization wished?Should the organization revise the message in light of the constituency responses?

What does the organization want each constituency to do?What resources are available?What is the organization’s reputation?

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A Strategic Approach to Communications

Identifying the key constituents:Employees

Public opinion leaders

Customers

Investors

Partners

Communities

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Overlapping Constituents

Information access has altered traditional constituentsEmployees are investorsAnalysts are customers Everyone has the ability to be a source, and use other un-vetted sources (blogs, published emails, rogue news sites) as credible information channels

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Implementing an Effective InternalCommunication Program

Focus on internal branding

Communicate up and down

Make time for face-to-face meetings

Create employee-oriented publications

Communicate visually

Communicate online

Consider the company grapevine

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Communicating Strategicallyto Build Business Partnerships

Introduction to Strategic CommunicationsThe changing business environmentUsing communications strategically to communicatewith internal and external constituentsEnhancing brand and reputationManaging risk and reputationCreating strategic alignment across communications activitiesCommunicating key values and measuring results

Key Takeaways

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What Are Identity, Image and Reputation?

Identity: That which is central, distinctive and enduring about a company

Image: The reflection of the organization from the vantage point of one constituency

Reputation: Collective images; how all constituencies view the organization; built up over time

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Corporate IdentityNames, Brands, Symbols, Self-Presentations

Corporate Reputation

Customer Image Community Image Investor Image Employee Image

is perceived by…

Sum of their perceptions equals…

What Are Identity, Image and Reputation?

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Why Does Reputation Matter?Well-regarded organizations generally:

Command premium pricesPay lower pricesEntice top recruitsExperience greater loyaltyHave more stable revenuesFace fewer risks of crisisAre given greater latitude by constituentsHave higher market valuation and stock pricesHave greater loyalty of investors and thus less stock price volatility

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Reputation “Scorecards”

Fortune’s “Global Most Admired Companies” list

Interbrand and BusinessWeek’s“Best Global Brands” rankings

The Reputation Institute and Harris Interactive’s “RQ Gold” Survey (featured in The Wall Street Journal)

Financial Times’ “World’s Most Respected Companies”

Barron’s “Worlds Most Respected Companies”

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Measures of Reputation

Fortune’s Global Most Admired Companies 20061. General Electric2. Toyota Motor3. Procter & Gamble4. FedEx5. Johnson & Johnson6. Microsoft7. Dell8. Berkshire Hathaway9. Apple Computer10.Wal-Mart Stores

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How They Got Those Results

Fortune’s Global Most Admired Companies 2006Survey respondents: executives, directors, securities analysts Criteria:

GlobalnessInnovationEmployee talentUse of corporate assetsSocial responsibilityQuality of managementFinancial soundnessLong-term investmentQuality of products/services

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Measures of Brand

Brand1. Coca-Cola2. Microsoft3. IBM4. GE5. Intel6. Nokia7. Toyota8. Disney 9. McDonald’s10. Mercedes-Benz

Value ($M)$67.0$56.9$56.2$48.9$32.3$30.1$27.9$27.8$27.5$21.8

Source: Business Week; August 7, 2006

Interbrand & Business Week’s Best Global Brands 2006

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Choosing the Appropriate Communication Channel

New ChannelsFaxE-mail InternetVoicemailElectronic meetingsPodcastsRSS feedsVideo-teleconferencing

Old ChannelsWriting Speaking

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Communicating Strategically to Enhance Brand and Reputation

Set strategic communication

objectives

Analyze constituencies

Deliver appropriate messages

Assess constituencies’ responses

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Communicating Strategicallyto Build Business Partnerships

Introduction to Strategic CommunicationsThe changing business environmentUsing communications strategically to communicatewith internal and external constituentsEnhancing brand and reputationManaging risk and reputationCreating strategic alignment across communications activitiesCommunicating key values and measuring results

Key Takeaways

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The Collapse of Swissair

• On October 2, Switzerland’s national carrier Swissair halted all its flights due to a severe cash shortage. Some 39,000 of passengersworldwide were grounded

• No communications representative was available to give advice tostranded passengers, who were offered neither alternative flights nor cash to pay for a hotel room

• The newspapers spoke of a “national tragedy,” stating that Switzerland’s image was “damaged beyond repair” and that this was a failure on a scale previously unknown in the Swiss business world

• The value of Swissair shares fell from 100 Swiss francs ($61) to barely 1.27 ($0.78), almost wiping out the companyﾕs entire share capital

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Business Environment Leading Up To Collapse

• The liberalization and deregulation of aviation markets, beginning in 1978 in the USA, mean that airlines are exposed to increasingly harsh competition in order to become profit making enterprises

• Drastic changes in European air travel were made, including a struggle to establish so-called hubs for high passenger numbers to be handled through linking intercontinental and regional feeder flights

• Intercontinental alliances were forged to cope with the changes,including a plan to make Swissair the fourth largest European airline

• But Swissair passenger numbers remained well behind expectations, and the beginning world recession meant the enterprise was unable to finance its ambitious plans

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Common Crisis Characteristics

• A rude awakening

• Rapid speed and event escalation

• Presence of panic

• Tendency to act irrationally

• Chaos in management communications

• Omnipresent media

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Communicating During a Crisis

• Define the problem

• Centralize communications

• Communicate early and often

• Get inside the media’s head

• Communicate directly with affected constituencies

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Relationship Between ReputationalCapital & Risk

The fluctuating value of the company’s reputation has been termed reputational capital and calculated as the market value of the company in excess of its liquidation value and its intellectual capital. It constitutes the residual value of the company’s intangible assets over and above its stock of patents and know how.

“Reputational risk” is defined as the range of possible gains and losses in reputational capital for a given firm.

Source: The Reputation Institute

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Reputational Capital

Provides a platform from which other investment opportunities may arise—similar to R&D in this respect:

Upside example: sound corporate citizenship improves relations with constituency groups and provides a holistic approach to implementing strategyConstituency groups are Community, Regulators, Customers, Partners, Employees, Investors, Activists, and MediaDifficult to quantify these gains but they existDownside example: Loss of reputational capital comes from thesesame 8 constituency groups; threats include rogue behavior by employees, defection by partners, and the threat of legal action by regulators

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Reputational Risk (RR)Commercial Bank Examination Manual says reputational risk “is the potential that negative publicity regarding an institution’s business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions…can also cause liquidity constraints and significant depreciation in market capitalization.”

Product offerings affect RR. Reputational risk (along with credit risk and legal risk) increases the more controversial a product is.

Outsourcing a key RR

Companies need to manage reputation risks in the same way as operational or financial risks are assessed, audited, and managed.

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Reputational Risk Management Cycle

OpportunityPlatform

CorporatePerformance

Reputational Capital

SafetyNet

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Managing the Upside of Reputational Risk

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Managing the Downside of Reputational Risk

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How should Companies manage Reputational Risk?

Prepare for potential problems

Develop a crisis management process

Plan your responses

Analyze constituencies

Provide as much certainty as possible

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Issues Management & RR – Longer Term (opportunity platform)

Potential Concerns Solutions

Lack of CEO succession planning Create communications succession plan and prepare for it

CEO compensation / perks protest from shareholders as stock price continues to fall

Create possible statement and institute proactive media relations

Increased scrutiny on industry practices

Proactive reputational risk research

More involved government relations (industry lobby)

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How to manage Reputation

Assess current reputation

Assess key constituencies’ perceptions

Determine who influences them

Create forum to manage reputation

Locate reputation in the context of issues management

Measure effectiveness of communications on reputation

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Key Takeaways

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Companies today have more arrows in their communication quivers than ever before to get their messages across to

varied internal and external constituents…

So why then do companies’ communicationsstill miss the mark?

Companies fail to recognize the importance of a strategically aligned Corporate

Communication function.

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Defining Strategic Alignment

Strategic alignment is:Mechanisms and processes in place (formal and informal) for communication and coordination across subfunctionsCollective mission to speak in harmony to all constituency groups —and act in a consistent manner

Strategic alignment is not:Siloed Corporate Communications subfunctions (IR, media relations, marketing comm, internal comm, etc.)Separate target constituencies among Corporate Communication subfunctions

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Strategically Aligned Corporate Communications Creates Benefits

Preserves corporate brand and enhances reputationA strong brand is a consistent brandEmployees as “brand ambassadors”

Helps firms weather crisisSpeaking with one voice is criticalActing swiftly and consistently

Achieves desired business outcomesReaching organizational goalsAligned with and supporting company’s overall strategyMaximizing shareholder value

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Planning for Strategic Alignment

Have a Plan

Strategically Aligned

Communications Plan

An overarching objective or set of objectives for strategic alignment

An approach to measure the

effectiveness of your plan

Clearly defined roles and responsibilities for all

members of the corporate communication

subfunctions

A clear link to the firm’s overall strategic

plan and business objectives

A definition of what constitutes

success

Organization characteristics

Size, geographic scope

Corporate culture Influences the success of one integration model over anotherAffects ability and scope of integration effort

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Approaches to AllignmentReporting relationships and organizational structure

Centralized, Decentralized or Matrix approach

Communications CouncilsEnhance coordination between key executives from across the businessAct as “sounding boards” and provide valuable feedback

Communications alignment manager postsEnsure coordination and communication across groups

TechnologyReach employees and measure effectiveness of communication

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Takeaways on Strategic Alignment

At best, lack of strategic alignment leads to missed opportunities; at worst, crisis

Many catalysts in today’s business environment have made alignment more of an imperative

Organizations have many choices in terms of how to align their communications activities

Strategic alignment plan must fit with how your organization worksInformal networks can play a key roleEnlightened CEOs can set the tone

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Key Takeaways

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Top 25 U.S. Corporate Brand Values

Top 25 U.S. Corporate Brand Values

RANK COMPANY Ticker Reputation Management InnovationHuman Capital

Current Brand

Value (in millions)

Percent of MV

1 PROCTER & GAMBLE CO PG 1 16 5 8 $107,380 80%2 MICROSOFT CORP MSFT 4 4 4 15 $103,073 38%3 LILLY (ELI) & CO LLY 10 3 13 30 $76,395 100%4 MERCK & CO MRK 44 11 8 23 $91,304 91%5 INTEL CORP INTC 8 43 3 3 $80,207 45%6 INTL BUSINESS MACHINES CORP IBM 15 25 1 1 $71,035 45%7 CISCO SYSTEMS INC CSCO 24 1 11 7 $69,634 44%8 COLGATE-PALMOLIVE CO CL 9 17 15 46 $29,415 100%9 MEDTRONIC INC MDT 11 40 9 30 $61,374 100%

10 GENERAL MILLS INC GIS 29 20 19 30 $17,488 100%11 UNITED PARCEL SERVICE INC UPS 47 7 25 43 $58,227 75%12 PEPSICO INC PEP 2 39 29 30 $56,135 64%13 GENERAL ELECTRIC CO GE 3 37 2 12 $54,199 18%14 MBNA CORP KRB 42 45 32 21 $34,740 100%15 ANHEUSER-BUSCH COS INC BUD 6 41 44 19 $42,997 100%16 SBC COMMUNICATIONS INC SBC 7 34 37 46 $51,185 64%17 HARLEY-DAVIDSON INC HDI 40 49 24 6 $15,705 100%18 FANNIE MAE FNM 39 32 43 23 $46,604 63%19 GOLDMAN SACHS GROUP INC GS 25 27 39 12 $46,560 94%20 COCA-COLA CO KO 14 22 21 40 $45,625 39%21 BELLSOUTH CORP BLS 16 24 28 46 $45,436 90%22 AFLAC INC AFL 34 38 42 5 $20,329 100%23 DUKE ENERGY CORP DUK 17 14 49 10 $19,760 100%24 KELLOGG CO K 18 19 26 30 $16,204 100%25 ALLSTATE CORP ALL 20 23 46 35 $31,434 100%

“How companies manage intangibles like brand…is tough to quantify. Until now.”

— Forbes, 10/28/02

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“Post-industrial enterprises run on intangible assets, such as … brand equity, capacity for innovation, and human resources. Yet none of these intangible assets appear on a balance sheet. This is another way of saying that the worth of a brand name like Citibank or Ford has no value.”

Walter Wriston, Former CEO, Citicorp

“Intangibles” are Driving Business Performance

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What Are “Intangibles?”

Corporate value increasingly depends on intangible rather than tangible assets like property, plant, and equipment

35 – 80% of corporate value is created by intangiblesManagers and financial analysts have begun to recognize the value that intangibles create in businesses

Intangibles include:BrandLeadershipManagementCommunications Technology and processes

Strategy executionCustomer relationsAlliancesInnovation / IPHuman capital / adaptability

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Property

PlantEquipment

Intangibles

Sales

Earnings

Market Value

What drives organizational value? What are the

components of intangibles?

What are the components of communications?

Customer RelationsBrand

Communications

Innovation StrategyExecution

Alliances

Management

Internal Communications

Media Relations

Reputation

Public Affairs

Marketing Communications

Web Outreach

IR

What Are Components of “Intangibles?”

Human Capital

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Organizational Leaders want AnswersHow can you allocate your communications assets?

Which messages and channels provide optimal impact?

How can you conduct communications risk management?

How much value does communications add to the organization’s results?

How can communications be better structured and integrated with the rest of the organization?

Is it worth the trouble?

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Yesterday Communications Professionals were Data-Rich, Information-Poor

Measurement tools failed to accurately reflect the value of communications:

Advertising equivalenciesClip countingMedia tracking and analysisAudience attitudes and reputation measures

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Now New Measurement Tools WillRevolutionize the Communications Industry

Output-based measures of communications are good for managing efficiency, but that is not enough.

New measurement techniques can link the value of communications activities — including brand — to organizational objectives, just like managers in other functions.

Better measurement will revolutionize the communications industry.

Discrete communications outputs transform to integrated measurable organizational outcomes.

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Key Takeaways

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Key Takeaways A number of factors have affected the business landscape in recent years, increasing reputational risk factors.

Because of the lack of public trust in big business, corporations need to think strategically about communications.

Reputation management will continue to grow in importance.

Instilling a broader sense of corporate responsibility is important.

Employees are critical to success.

Decentralized management is fine, but strategically aligned communications is needed to “speak in harmony.”

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