MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Reputation Mountains from Satisfaction Mole Hills

C. HUYGENS - Wednesday, November 27, 2013
The old joke about medical mediocrity, Jeopardy style, had the punchline "Doctor" to the set up, "What do you call the students who graduated at the bottom of their medical school class?" Humor aside, that job title, which once ensured a stable respectable income, is losing its intrinsic value as standardized patient satisfaction measures become public. A reputation for quality matters.

Alas, the road to hell is paved with good intentions. The Centers for Medicare & Medicaid Services, an $820 billion operating division of the United States Department of Health and Human Services, administers the HCAHPS (Hospital Consumer Assessment of Healthcare Providers and Systems) survey, the first national, standardized, publicly reported survey of patients' perspectives of hospital care. The HCAHPS (pronounced "H-caps") survey asks discharged patients 27 questions about their recent hospital stay. The survey contains 18 core questions about critical aspects of patients' hospital experiences (communication with nurses and doctors, the responsiveness of hospital staff, the cleanliness and quietness of the hospital environment, pain management, communication about medicines, discharge information, overall rating of hospital, and would they recommend the hospital).

The survey has teeth. Since October 2012, hospitals whose HCAHPS scores have been subpar have been penalized with reductions in their Medicare and Medicaid reimbursement.

Here's the rub. There are perverse incentives in a system that seeks to optimize its operations for only one stakeholder group: patients. Without in any way diminishing the importance of customer (patient) satisfaction, a medical center's highest goal is to provide the greatest degree of affordable access to the highest quality care. Satisfaction has much to do with expectations that in matters of life and death, are often emotionally laden; quality care has much to do with optimizing health outcome in the setting of limited resources. The former is only one of several contributors to the latter, which at the end of the day, is the foundation for a medical center's reputation. There is an inherent tension, captured in the dark comedy doctor-coming-of-age novel, House of God, and rule #13: The delivery of good medical care is to do as much nothing as possible.

It does not help matters when the two concepts, patient satisfaction and institutional reputation, are intermingled. As Jonathan Salem Baskin points out in his blog at Consensiv, "Pleasing a clinic customer now will certainly have an impact what other customers expect from a future visit, but that influence isn’t necessarily direct or reliable. We presume a variety of operational variables affect reputations in the clinic industry, such as services offered, accessibility, accountability, pricing and reimbursement, even the unavailability of competing services."

Reputation mountains should not be built on patient satisfaction mole hills. It's a bad business strategy; it is also a bad health care delivery strategy.
Read more.

GM: Brand v. Reputation, Impala Edition

C. HUYGENS - Tuesday, November 12, 2013
A brand is a promise; a reputation is the promise expected, after discounting. Consider Chevy's Impala. The brand:

Impala has always been a flagship for Chevrolet. But a leader should never rest on the laurels of its past — especially when it wears the Chevy bowtie. So, when it came time to reinvent one of the brand’s most iconic nameplates, Chevy designers and engineers reached far into the future and shaped it in the present.

Are laurels of the past sufficiently solid to support such a promise? Apparently not, according to a review of the car by the Globe and Mail's Ted Laturnus. The reputation:

"I don’t trust this car. Or, more to the point, I don’t trust those that have come before it. Traditionally, the Impala has been one of the more problematic models in GM’s stable…"

Read more.

Brand reflects the owner's aspirations; reputation reflects the expectations of stakeholders; and reputational value is the economic consequence of decisions made by myriad stakeholders that impact every line item of a company's P&L. Q.E.D.

Boeing: Rough landing

C. HUYGENS - Monday, October 14, 2013
"Any landing you can walk away from," wrote U.S. Army Air Forces photographer Gerald Massie after crash-landing his B17, " is a good one!" What was true in 1944 is true today: the good news is Boeing is walking.

However, the BP-like serial doling of Dreamliner-associated issues has taken its toll, and Boeing has been winged. For the first time in modern history, Japanese national air carriers are opting for the competition.

Mission Intangible Monthly Briefing moderator Jonathan Salem Baskin published this thoughtful essay on innovation risk and its management in Forbes this past Friday. Read more.

The Steel City Re reputation metrics for Boeing show slow progressive value loss in its CRR Rank (Reputation Premium) from the 95th to the 89th percentile over the trailing 12 months. Notwithstanding daily meetings at Boeing hosted by CEO Jim McNerney, and his April 2013 declaration that "the original promise of the 787 is fully intact," the engineering issues have not abated -- the reputational volatility, termed Current RVM Volatility below (or Consensus Trend) evidence this persistent uncertainty. Stakeholders are no longer as confident (see Historic RVM Vol below) that Boeing is (or was) in complete control of its innovation processes.

Yum!: Tums, please

C. HUYGENS - Wednesday, October 09, 2013
Reputation is the confidence stakeholders have that a company will fulfill expectations. A reputational value crisis arises when a company fails to do so and stakeholders realign their expectations.

Last year, Yum! Brands' supply chain quality control processes failed and toxic chickens were served through their KFC outlets in China. The problem has come home to roost. From yesterday's Associated Press wire story, "KFC's parent company Yum Brands says its profit fell 68% in the third quarter, as its China unit struggles to recover from a controversy over its chicken supply and bird flu scare. Results missed expectations and Yum lowered its outlook. Shares fell 6% in aftermarket trading."

Expectations of food quality appear to be near-universal, and customers the world over, provided they have a choice, will do just that: choose. For the time being, Yum! is not top choice.

Kanebo: It looks bad

C. HUYGENS - Thursday, September 19, 2013
Charles Haskell Revson, founder of Revlon, liked to remind people that while his company manufactured cosmetics, it sold hope. Kanebo, a division of Kao Corporation (TYO:4452), ranking hope higher than safety or "confusion," continued selling defective skin whitening products more than a week after it was discovered that the product caused blotching.

Skin whitening products are popular among women all over east Asia, with users seeking lighter tones. The recall, involving almost 4.75 million products on retail shelves, was announced July 4, almost a week after Kanebo first decided to take them off the shelves.

News of the delay emerged in early September with pundits concluding that this will probably damage Kanebo's (and therefore Kao's) reputation. Perhaps, writes reputation controls expert Jonathan Salem Baskin. "Reputation, however, isn’t the purview of marketing or the outcome of good or bad publicity, but rather the result of financially-relevant stakeholder behaviors...Kanebo’s sourcing, manufacturing, and distribution operations are the drivers of its reputational value, and it will be interesting to see how it addresses any failures or shortcomings its investigation uncovers in areas such as sustainability, quality, and reliability. And only then will it see how deep its problems may go."  Read more.

The ethical issues associated with the recall delay raise another concern. It is possible that stakeholders' expectation of prompt action will conform to a standard that arguably was set by Johnson & Johnson in 1982. Or not. Much depends on the degree of goodwill Kanebo had established with its customers prior to this process failure, and the degree with which those customers concur with Kanebo's decision to delay notification "...(not to cause) confusion among customers... Concerns among customers could get worse if we were not properly prepared to answer their questions."

According to the news source Happi, "as of August 25 a total of 8,678 consumers in Japan had been confirmed to have blotches after using creams such as "Blanchir Superior", with 65 people reported as having the trouble overseas, according to Kanebo. The value of shares in the parent company Kao has fallen more than 15 percent since the recall was announced." Read more. 

Boeing: When customers expect delay

C. HUYGENS - Friday, September 13, 2013
The financial benefits of a superior reputation among customers, Huygens has explained, arise from one or more of these three factors: customers will grant the firm pricing power, will purchase greater volume, or will shorten the sales cycle time. Raise the price, and the volume will fall. Lower the price and the sales cycle time will shorten. A superior reputation provide a company the opportunity to optimize the three for maximum enterprise value.

For those familiar with Cajun cooking, these three factors are like the trinity of onion, celery and green peppers. The ratio in which they appear in a particular meal depends on the chef's tastes, but irrespective of ratio, they provide a constant mix of water, solids and salt. Boeing, as reported by Reuters and discussed in the Consensiv blog today, is fighting a lengthening sales cycle time with aggressive pricing. The problem is that the Japanese airlines that have had the pleasure of sharing Boeing's growing pains are concerned about delay risk. And are therefore delaying their own decision making.

"...little concerning the 787 program has been business as usual at Boeing. It is a wildly innovative plane, from its design and manufacturing, to its performance and experiential capabilities. So it was never credible that its stakeholders should have been told (or allowed) to expect it to resemble past projects. Innovation comes with risks, but there was never an overt or clear effort to value and control it, leaving a delivery schedule as the only proof that made sense to everyone: No matter how different, the ultimate outcome of building and selling a new airplane would be the same. Only it wasn’t and isn’t, as evidenced by the reputational risk now being charged to Boeing.

The Reuters reference to the company countering with “a sales offensive” likely means reduced prices and higher costs on its planes. There are probably borrowing and insurance implications commensurate with this new reality. Perhaps the suppliers it relies upon for parts for the 777X will expect more liberal terms and protections, which will also hit the company’s bottom-line."
Read more here.

The Steel City Re reputation value metrics show that over the year, Boeing's reputation premium has been deteriorating. Over the summer, all vectors have been negative. Moreover, over the past four weeks, current RVM volatility has begun rising.

The metrics have a cyclic pattern reminiscent of the water torture BP went through, albeit to a much lesser degree. Still, the bad news is progressive, and as suggested in July, Boeing has reason to fear a BP moment -- when it becomes clear that stakeholder's worst fears are coming true.

Heinz: Meal deal

C. HUYGENS - Thursday, February 14, 2013
Early Thursday morning, The Wall Street Journal and the Pittsburgh Post Gazette, among many others, reported that H.J. Heinz Co. said it agreed to be acquired by Berkshire Hathaway Inc. and private-equity firm 3G Capital for more than $23 billion. Under the terms of the deal, which has been unanimously approved by Heinz's board, shareholders will receive $72.50 in cash for each share, a 20% premium to Wednesday's close. As expected, Heinz Chief Executive William Johnson affirmed, "The Heinz brand is one of the most respected brands in the global food industry and this historic transaction provides tremendous value to Heinz shareholders."

Deconstructing the deal from a reputational value perspective, Berkshire Hathaway is paying a 20% equity price premium to acquire a company with the highest reputational value premium in its sector, as shown in the reputational value metrics charts from Steel City Re. As discussed in Reputation, Stock Price, and You (Apress, 2012), the potential equity value implied by the reputational value premium was there for the taking;  equity investors -- Warren Buffet, excluded -- just weren't seeing it. That value arbitrage, to give a name to Buffet's investment strategy, is what the RepuStars Algorithm attempts to expose through the RepuStars Variety Corporate Reputation Composite Equity Index (Ticker: REPUVAR).

Side Bar: Berkshire Hathaway and 3G Capital have pledged to maintain Pittsburgh as Heinz's global headquarters. The word "Variety" in the full name of the RepuStars Index comes from Heinz's tag line, 57 Varieties, for the reason that RepuStars comprises a portfolio of up to 57 names. RepuStars Variety returns are reported each week on this blog. Steel City Re, which calculates the measures of reputational value and volatility, is also headquartered in Pittsburgh.

Returning to the measures, as of last Thursday when these were last calculated, Heinz's CRR, a measure of relative reputational ranking, was in the 96th percentile. Return on equity was in the 56th percentile, and RVM volatility, a non-financial measure of reputational value volatility, was in the lowest decile for most of the year spiking only recently to the 68th percentile. Return on equity has been keeping with the median for the sector. Last, prospects for future change, as reflected in the CRR vector and the related indication of stability at the 86th percentile, suggested little expectation of change. In other words, each of the various stakeholder groups, holding expectations appropriate to their experiences with the company, thought that they were valuing the company properly. Those views were not aligned -- but which group was off the mark?

Buffet's actions today, affirming the logic of RepuStars, suggest that equity investors were missing the boat.

US Airways: Soaring

C. HUYGENS - Thursday, February 07, 2013
There is good news in the airlines industry. Notwithstanding safety issues on the hardware side of the business at Boeing, the service side is getting some recognition for improved quality. As Huygens points out from time to time, its great to have a superior reputation and capture the economic premium. But if equity investors have already factored all that into the stock price, there is little upside potential. The big returns come from companies with poor reputations and little reputational value premium who surprise everyone with better (fill in the blank.) In the airline business, there is only one variable measure: service quality.

Compare USAirways (NYSE:LCC) and Delta (NYSE:DAL) as reflected in the Steel City Re reputational value metrics. Over the past year, USAir's CRR, its relative rank or reputation premium, grew; equity prices grew to match - with a 70% ROE. Going forward, and based on both the CRR velocity and RVM volatility, it looks like Delta will make the next hop upward. Soon.

YUM!: Food safety issue comes home to roost

C. HUYGENS - Wednesday, February 06, 2013
Everybody has problems. Boeing has an airplane problem. Tesco has a hamburger problem. And YUM! has a chicken problem. Three different commercial sectors each with quality problems, often leading to safety issues, with one common element. All of the problems originated within the companies' supply chains, comprise failures in operational oversight and control, and have the potential for blossoming into full-on reputational crises.

Reputational crises are expensive. Customers slow down their purchase frequency and extend the their purchase decision cycle, to say nothing of their resistance to premium pricing. But the pain goes further. Vendors offer less favorable terms; creditors raise the cost of capital, employee turnover is but one indicator of morale problems that start brewing, NGOs take interest, and regulators start paying more attention. And of course, equity investors, who have the shortest fuse, sell. That is why Huygens prefers to call them, "reputational value crises."

CNBC reported yesterday that Yum Brands, the parent of restaurant chains Taco Bell, KFC, and Pizza Hut, reported surprise weakness in China. "This skews to the worst case for the company," said David Palmer, managing director and senior food & restaurant analyst at UBS, who covers the company. China represents almost half of the business, in profit terms, for the company, he said in an interview on CNBC's "Squawk on the Street."

Forbes reported, "At YUM’s analyst day on December 6, 2012, we asked CEO David C. Novak what his “defense” was to media exposes that one of KFC China’s suppliers had pumped its chicken full of chemicals to expedite their growth. The story prompted a furious social media reaction. His answer was “No worries. It will blow over.” When asked how, he shrugged: “It always has.”

Turning to a measure of reputational value, the Steel City Re reputational value metrics, the measures for YUM! in contrast to McDonald's, the sector reputational leader, are informative. The problem, it seems, hasn't blown over. The company's reputation ranking is sinking steadily and the forecast last week as shown below, before this week's news, was for further deterioration. The steadiness of the deterioration was suggested by the RVM volatility measures and the median forecast stability numbers. RVM, as Huygens' followers know, is a non-financial measure of reputational value.

YUM!'s loss would reasonably be expected to by McDonald's gain. MCD, with a CRR, a measure of relative reputational ranking, buried at 1.0 for the sector, could only gain in RVM.  MCD's RVM volatility suggests this is the case, and not surprisingly, its ROE has been climbing as YUM!'s has been sinking. 

The moral: supply chains are great sources of cost savings, value, operational risk, and reputational value risk. Their operations need to be overseen and controlled no less so than organic operations. And if the excuse is that the whole point of outsourcing was to reduce the costs associated with organic controls and oversight, well, then, add that sentence to the ever-growing collection of things that seemed like a good idea at the time.


Tesco: Reputation is stable

C. HUYGENS - Tuesday, February 05, 2013
"They’ve found horse meat in Tesco burgers? It’s an unbridled disaster." Through internet-wide humor, at the very least, Tesco is being reminded that supply chains can be a major source of quality risk. As the FT reports:

Having inquired into the provenance of beefburgers that contained horsemeat, it has dumped Silvercrest, its supplier of frozen burgers, essentially for deviating from the list of Tesco-approved meat suppliers. “The breach of trust is simply too great,” said Tim Smith, the UK retailer’s technical director, in a statement. (The owner and founder of Silvercrest’s parent told the FT earlier this month it had been “let down” by its own suppliers.)


Humor aside, stakeholders do not appear to be materially shaken by this turn of events -- a supply chain quality control (operational) failure -- with respect to Tesco's reputational value.

The Steel City Re Reputational Value Metrics, explained in greater detail in the 2012 book, Reputation, Stock Price and You, show no difference in RVM volatility between historic and current periods. RVM is a non-financial measure of reputational value and is holding steady in the 70th percentile. The company's CRR, a measure of reputational ranking, is at the 26th percentile. Its economic returns are median, and its reputational forecast suggest slightly below median stability with directionality indicators being positive.

The data suggest that stakeholders, having already ranked the company at the lowest quartile, were less shocked by Tesco's discovery of horse meat than they were pleasantly surprised by the company's swift response. First, severe action against a supplier to punish it for its failure and second, a commitment to  test the DNA of meat going forward to mitigate future potential problems. These comprise textbook reputational value crisis management practices. [A textbook response, it should be noted, is not PR; but rather substantive operational fixes. Pass the hint to Boeing.]

For supply-chain watchers, note the references to "trust" and "being let down." Supply chains can not operate effectively absent trust nor can they operate only on the basis of trust. Tools that help companies verify that which is the basis for trust will become increasingly important. Stay tuned.




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