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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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McDonald's - Curb Your Enthusiasm

C. HUYGENS - Sunday, May 24, 2015
McDonald's is objectively in difficult straights. Economic news for Q1 reported in mid April was dismal with global sales down by 2.3%, revenues down 11%, and income down 28%. Strategically, the company mollified investors by returning $1.4 billion to shareholders through dividends and share repurchases.

But there is reason for guarded optimism. The company is beginning to understand what drives its reputation, if its public reporting is a valid indicator. Mentions of reputation are up 300% in item 1A Risks.

For the first time in the company's K's and Q's, it acknowledged in 2015Q1 that quality impacts the firm's reputation. "Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe food products…In 2014, food quality issues were discovered at a supplier to McDonald’s and other food companies in China. As a consequence of this issue, results in China, Japan and certain other markets were negatively impacted due to lost sales and profitability, including expenses associated with rebuilding customer trust. Any future instances of food tampering, food contamination or food-borne illness could adversely affect our brand and reputation as well as our revenues and profits."

"With new U.S. leadership, the U.S. is focused on a strategic roadmap that includes a revamped marketing approach…" Might quality by part of the turnaround? Hard to say. There is no indication that it is part of the increased investment into marketing. "Selling, general and administrative expenses as a percent of revenues increased to 9.8% for the quarter 2015 compared with 9.3% for 2014, and as a percent of Systemwide sales increased to 3.0% for the quarter 2015 compared with 2.9% for 2014, as weaker foreign currencies are having a bigger impact on revenues and sales."

Exuberance should be tempered by the sobering fact that the term quality only makes one other appearance in the filing. Quality is mentioned in a string of attributes on which the company competes, "We compete on the basis of product choice, quality, affordability, service and location"-- issues that are relevant to marketing. Quality is not discussed in the context of operations or controls.

Turning to the reputation value metrics, which can be viewed as either controls on the process that affect reputation or a window into stakeholder assessment of governance, and there are again reasons for guarded optimism. McDonald's Reputation Value Metric is still in the 99th percentile among the 76 firms in the restaurant peer group with a very low Consensus Trend. On the other hand, the sobering news is that its reputation value metric has been declining for nearly a year.

The data suggest that the enterprise's reputation for a reliable, repeatable quality experience, currently at 80% of its potential, may be restored. First, McDonald's should recognize that the aforementioned list are the core values that underpin the expectations of the stakeholders who consumer McDonald's products. That would tackle the quality challenge.

The Company also faces significant pressures on the labor front. The Company should appreciate that employees who are engaged with a Company that is well respected will find intangible benefits of employment  will offset some fraction of wage costs.

These benefits become transparent on the P&L, and in enterprise value, but they come only to those whose governance organization understands the rules of doing business in the 21st century.

NFL: Reputation sacked again

C. HUYGENS - Tuesday, September 23, 2014
In the entertainment business Disney knows so well, managing reputation is a business imperative. The NFL has been sacked three times in as many years for reputation losses. Blame the Internet, if you will.

Warnings dating back to 2009 predicted that “hyper-transparency” enabled by the Internet would change the boundaries used to assess a company’s scope of control, and its degree of accountability and responsibility. Since then, stakeholder pass rushes have sacked the NFL thrice: for poor quality and greed, poor safety and greed, and now poor ethics and...greed?

Read more.

This Week at Lake Reputation-be-gone

C. HUYGENS - Friday, July 25, 2014
"It was hardly a quiet week at Lake Reputation-be-gone," Garrison Keeler might have said. "Walgreen, McDonald's & Yum!, and current poster-child GM had their respective moments in the sun...again."

Walgreen's issue is an ethical one. The company whose motto proclaims it to be "the pharmacy that America trusts" would just as soon not pay America $4 billion in taxes over the next five years. The company is now deciding whether to take advantage of the US tax law loophole that would reward it substantially with a lower tax base were it to acquire controlling interest in a Swiss-based company and nominally relocate its headquarters overseas.

McDonald's and Yum! were apologizing for supply chain issues that again raised questions of food quality and safety in the Chinese operations. Earlier this week, Chinese regulators closed the Chinese division of an Illinois-based good supplier (OSI) after a TV report showed workers picking up meat from a factory floor and mixing expired lots with fresh lots of meat. Upton Sinclair would have been proud.

GM announced six additional automobile recalls this week bringing its total for the year to 60 announcements covering 29 million cars worldwide. Quality and safety issues are at the forefront, but they are not all associated with supply chain failures. Some, in fact, are due to assembly and integration issues in GM's wholly-owned operations.

As is the case after every major operational issue, the press is making much ado about the damaged reputations of these firms. The events are certainly news-worthy and embarrassing. Whether they cause stakeholder to reassess their respective relationships with the companies, however, is the central issue in a reputation crisis.

Walgreen's issue is unlikely to have any effect on most stakeholders. Equity investors will be thrilled, and creditors equally so. Legislators are unhappy, but it is not clear their opinion matters much since they have proven their inability to do much of anything.

This is Yum!'s second bout of China-related supply chain safety and quality. The toxic chickens of 2012/2013 gave them quite a reputation scare, which is why they may have dumped OSI like a hot pan. McDonald's is new to this type of crisis and is sticking with OSI. Also, McDonald's maintains qualitatively different types of relationships than Yum! with its suppliers. By forgiving OSI, McDonald's is demonstrating the benefit of OSI's historically stellar reputation…to OSI.

GM is now in a league of its own. Credit the company with fabulous spin control by declaring that Wednesday's additional recalls signified how the company had enhanced its approach to safety.

IAFinance.org Monthly Traffic

C. HUYGENS - Sunday, May 04, 2014
In the book, Reputation, Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012), quality is defined as the extent to which a product is free from defects or deficiencies; the extent to which a service meets or exceeds the expectations of customers or clients, especially in comparison to peers; and the extent to which products and services conform to measurable and verifiable criteria. It is an intangible asset and one of six pillars of reputation.

An indication of quality, and by extension, the reputation of something like the Mission Intangible Blog of Intangible Asset Finance Society is the growth in readership. Two years ago in May 2012, this blog received 10,228 page views according to metrics provided by Business Catalyst, a unit of Adobe. Last month, April 2014, this blog received 351,000 page views. Thank you for your interest.

IP Quality - 1, 2, 3 What Are We Fighting For? - 16 May 10h00 EST Mission Intangible Monthly Briefing

C. HUYGENS - Friday, April 25, 2014

Briefing Friday 16 May at 10h00 ET

Program: IP Quality - 1, 2, 3 What Are We Fighting For?

The hardest part of business to business contracting used to be haggling over price; today, it is just as likely to be haggling over intellectual property rights. This is because Intellectual Property is potentially valuable -- provided it is really good stuff. What are the measures of "good?"

Joining the program to explore the patent quality and quality controls, and the critical role of the business executives in enabling patent quality, are John W. Kepler, JD, an attorney and authority on IP quality; and James M. Singer, an intellectual property attorney with Fox Rothschild and head of the firm's IP section. Mr. Singer and the law firm of Fox Rothschild LLP support the Society through pro bono legal advice in intellectual property matters.

Jonathan Salem Baskin,  Managing Director of Consensiv, moderates. Learn more.

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. 

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