Repucratic Revolution: What it means for your company

Workshop Speakers from:
3M
AstraZeneca Pharmaceuticals
Bell Atlantic Corporation
Boeing Company
Citigroup
Conectiv
Continental Airlines
International Paper
KPMG LLP
Lockheed Martin
Merck & Company
New York Life Insurance Company

Do you believe your reputation is changing with the times? It is. And today I will show you why.

First, I’m going to describe a sudden and radical shift in the values that underlie the practice of reputation management. I’ve coined a term for this cataclysmic shake-up: the Repucratic Revolution.

Then I’m going to describe how to deal successfully with this upheaval. I call it the Zenification of Reputation Management.

And finally, I am going to describe a tool that can enable you to keep ahead of this rapidly-changing world. It is the Reputation Forecast.

Just so we’re clear, let me reinforce a key point here: Reputation is ‘the general opinion of a person or entity that is held by others.’

Your corporate reputation is a combination of what you project and what your audience perceives. It is not the character or accomplishments of your organization. It’s the public perception of your organization’s character and accomplishments.

We’ve always known that a good reputation is an incredible asset. It makes every aspect of business easier. It also provides a reservoir of trust that can be tapped in bad times. If you lose it, every aspect of business gets more difficult and more costly.

Poets have recognized the importance of reputation for millennia. In the first century B.C., a Roman poet wrote: ‘A good reputation is more valuable than money.’ Well, as I will demonstrate shortly, the financial community is beginning to recognize that it is money.

You have a reputation whether you do anything about it or not because time, circumstances and technology have an impact on the ways in which people perceive you.

The toughest job in our business is maintaining the precarious balance between the forces of change and the establishment of a permanent spot in the hearts and minds of the public.

And it’s a job that’s getting harder every day. That’s because there’s a revolution afoot ... a shift so massive that it is overturning many of the values that corporate management holds dear.

As I said earlier, we’re in the midst of the Repucratic Revolution.

Democratic means governed by the people. Repucratic means governed by reputation.

The Repucratic Revolution is the radical shift in which your corporate reputation - an intangible asset - is displacing physical and financial assets as a key factor in the valuation of your company. And both accountants and Wall Street are starting to recognize it.

Thus, fixed assets are becoming less valuable and intangible assets are becoming more valuable.

In a current study called ‘Measures that Matter’ conducted by Ernst & Young, of portfolio managers, 300 sell-side investment reports and 275 buy-side investors, they concluded that at least 30 to 50 percent of a company’s value is in intangible assets.

What are these intangibles?
• Brands
• Expertise
• Management credibility / employee loyalty
• Public trust

Together, they add up to your reputation and how ’effectively you communicate it. The Ernst & Young ’study reinforces the importance of communication’ of intangibles with this statement:
‘How skillfully companies manage key nonfinancial areas of performance and then communicate related successes to outside constituencies - shareholders, investors – will have a powerful effect on how they are valued. In fact, the more analysts use non-financial measures, the more accurate their earnings forecasts become.’
... and the accounting industry knows it must adapt. The chairman of the American Institute of

Certified Public Accountants said: ‘Like it or not, non-traditional yardsticks are on the way.’ Thus, the pressure to act is significant.

Compare the breakdown of the market cap of General Electric in 1983 vs. 1999 Ð and this is only one of many such examples. In 1983, with a market capitalization of $26.5 billion, 58% of that was based on intangibles vs. 42% fixed assets. In 1999, with a market cap of $351.2 billion, 89% is based on intangibles vs. 11% fixed assets.

As is evident, corporate valuation is moving in the direction of intangibles. And this will increase the importance of what public relations does.

Two key factors are causing the Repucratic Revolution: The phenomenal growth of the Internet and the democratization of the media.

By linking together every element in the supply chain - from customers’ customers to vendors’ vendors - the Internet reduces the need for other tangible assets like inventory and stores. As a result, it costs very little to establish or expand a business on the Web. And you can quickly blow your competition right out of the water. Just look at Amazon.com ... a company that helped launch the Repucratic Revolution.

Amazon.com founder and CEO, Jeff Bezos, says his wake-up call came when he read that Web use was growing 2,300 percent a year. He realized that an efficient retailer could do away with the bricks and mortar of physical stores and serve customers better on the Internet. If a chain of 1,000 stores wants to double sales, it has to open a lot more stores with all the associated real estate and HR costs.
But once an online operation gets passed the fixed cost of its Web site and distribution channel, it can handle incrementally larger sales with few additional infrastructure expenses.

Amazon.com opened its virtual doors for business in July 1995. By the end of 1998, more than 4.5 million people from 160 countries had shopped at Amazon.com, making it the leading online retail site with sales of $500 million. That year, it also beat 113-ye a r-old Sears in market capitalization value.

Today, despite a profit margin of minus 29 percent,

Amazon.com is valued at $22.2 billion. In comparison, Barnes and Noble, while it too has its own Web site, also has more than 1,000 bookstores in 49 states and, combined with its online sister, is worth only $4.1 billion.

Clearly, a major presence in cyberspace trumps a major investment in real estate ... at least as far as the investment community is concerned.

The second cause of the Repucratic Revolution is the democratization of the media.

Not so long ago, most Americans took their news from one of three network TV stations, two local newspapers or four weekly newsmagazines. Today, they have a multitude of choices:
• 100 cable stations
• 18,000 magazines
• 300 million Web pages
• 2.2 million Web sites
• 30,000 Usenet newsgroups
• 90,000 listserv mailing lists

Consumers are self-selecting the media that are the most convenient and useful to them. And they are creating their own media that others are reading, watching and listening to. This is a radical development because one dissatisfied customer or unhappy employee has the power to undermine your reputation faster and more profoundly than in any previous time in history.

A famous New York newspaperman, A.J. Liebling, said in 1960, ‘Freedom of the press belongs to the man who owns one.’ Today, everyone with an Internet connection owns one.

If you’re still wondering if your reputation is changing with the times, then consider the Pentium Chip fiasco that cost Intel $500 million. That situation shows just how fast a market leader can be knocked off center by today’s version of “freedom of the press.”

It took two months from the time the message about the error in the chip got out for Intel to apologize, when it should’ve taken two minutes.

By the way, the company had discovered the problem on its own, four months before a professor, unknown to Intel, sent an e-mail about it, but its research showed that the flaw would take 27,000 years to surface for the average computer user, so Intel decided not to tell anyone about it.

But as Andy Grove discovered, the consequences of the Repucratic Revolution are profound. Here are five we see:
1. The “whirling wheels of change” are picking up speed
2. There are no holidays in the wired world
3. Your exposure is absolute
4. There’s no such thing as a sustainable competitive advantage
5. The net effect: A reputation is a slippery thing

Let me address each of these points.

•  The “whirling wheels of change” are picking up speed

As we saw from the Intel example, the Web is the fastest - moving medium in history and most managements are still not structured to move as quickly as reputations deteriorate.

The Web is also the fastest-growing mass medium in history. Morgan Stanley calculates that it took the Internet only 5 years to reach 50 million users. By comparison, it took cable 10 years, TV 13 years and radio 38 years to reach the same critical mass.

Anyone can launch a company in cyberspace almost instantly. Your reputation is at the mercy of anyone in the world who may have an ax to grind. And, as a result, building and protecting brand names and reputations online is more challenging than offline. Your reputation is a moving target.

• There are no holidays in the wired world
Another consequence of the Repucratic Revolution is no time off. There are no holidays in the wired world. The Internet is open 24-7. Reputation managers have to be available literally around the clock. That should make salaries go up!

• Your exposure is absolute
What’s offline generally finds its way online and vice versa. Nike learned that through a major protest at its flagship store organized via an e-mail campaign that resulted in national print and broadcast publicity.

• There’s no such thing as a sustainable competitive advantage
There are only temporary advantages. A decade ago, Alvin Toffler wrote that the next major competition would not take place between the east and the west, but between the fast and the slow. Schwab Online, for example, had the market to itself for virtually 5 minutes.

• The net effect: A reputation is a slippery thing.

Want proof? If you look at Fortune’s list of the Top 10 Most Admired Companies since 1997, based on surveys of thousands of business people, you’ll find that over this relatively brief span of three years, only four companies - Coca-Cola, Microsoft, Intel and Berkshire Hathaway – consistently maintained their top ten status.

I reiterate: Reputation is a slippery thing.

Therefore, what’s the mindset you need to deal with reputation management now?

I take the Zen approach because I believe that there is no objective reality and human beings can be irrational. This is my mindset.
Practitioners of Zen believe that the observer shapes reality. So do I. As the Buddha has said,
‘Everything is based on the mind, is led by the mind, is fashioned by the mind.’

For example, who produced the first commercial PC? Most people answer ‘IBM.’

In fact, it was Remington Rand - the typewriter people. IBM was the first company to build a position for the PC in the mind of the public. Reality hasbeen shaped.

Consider this: Nearly 70 years ago, Louis Cheskin conducted a classic experiment in the psychology of marketing. He put an identical product – I repeat, identical product - in each of two different packages, one with circles on the outside, the other with triangles. Then he asked his test subjects which product they preferred. Eight out of ten preferred the product in the box with the circles to the box with the triangles. When he asked them why, they said that the box with the circles contained “a higher-quality” product. Then the test subjects were asked to actually use the products, and they still had the same opinion.

What can we draw from this story? Despite your best efforts at reputation management, human beings may react in unpredictable and illogical ways. I believe reputation management operates as much on intuitive feelings as it does on science.
Nevertheless, most of the times when you apply the science in the very best way, the results are there.
But in a rapidly changing world that is devoid of objective reality and one in which people can be fundamentally irrational, you must allow for a greater margin of error. As we enter the realm of intangible assets, you need to educate your management to understand the reality ofintangible assets.

The Zen-ification of Reputation Management also requires that we do everything possible to stay in touch with and understand our audiences, including our competitors.

In this New World, there is no ‘us’ vs. “them.’
There is only‘us. It’s not impossible to break down the barriers. Look at what the U.S. Postal Service is doing.

Since people often react in irrational and illogical ways, there is an “unpredictable” dimension to reputation management.

Many of you may know that e-mail is the most popular Internet application.

There are 9.4 billion e-mail messages sent every day in the U.S. alone. By way of comparison, 107 billion pieces of first class mail were delivered in the U.S. in all of 1998.

But snail-mail still has its place ... even among avid Net-heads. More than 90 percent of U.S. households with e-mail said they prefer regular, postal mail to e-mail when receiving bills, bank statements and other financial reports at home.

So what does the Postal Service do?

It has developed an e-stamp, PC-generated postage that can print postage from your PC directly onto each envelope.

Clearly, the Postal Service has recognized the law of increasing returns: The more people use the Internet, the more valuable it is. It is capitalizing on the Internet without compromising its core competencies.

Another way to break down the barriers between “us” and “them” is to recognize that the age of monologue is over. The wired world has ushered in the age of dialogue, and every company needs to set up dialogue systems over the Net with audiences that matter.

Still a third way to break down the barriers is to answer a deceptively simple question: Who is my company today? If you can’t succinctly define your company, then how can you expect your audiences to do so? A clear, up-to-date definition of the company is baseline in the repucratic world.

But take another step. What about tomorrow? Ask yourself: Who is the company tomorrow?

In the turbulent times of the Repucratic Revolution - as the whirling wheels of change spin ever faster - tomorrow is the most important date on your calendar. The standard retrospective “attitudeawareness-usage” study tells you what you were. But it doesn’t tell you what you could or should become tomorrow. The Reputation Forecast does.

You’re already aware of the benefits of a financial forecast. Similarly, the Reputation Forecast is a basic tool for thinking strategically about the future of your reputation. It makes it possible for you to identify potential opportunities and vulnerabilities early on, before any action - or lack of it - can irreparably damage the reputation of your company.

I suggest you do a Reputation Forecast at least on an annual basis and review it quarterly or even monthly because change is so rapid. The Reputation Forecast lets you examine a set of factors that are likely to have an impact on the ways in which your company is viewed by all of its constituencies. They are likely to include demographic trends , psychographic profiles, the economy, the impact of technology, competition and political/regulatory forces.

Each has the potential to play out on a local, national or global level. Each will have an impact on your employees, shareholders, customers and suppliers ... and ultimately, on your reputation.

Let’s look very briefly at the wealth of variables within just one factor - demographics - that can influence your reputation in the future.

Ethnicity: Hispanics, African-Americans and Asians now represent $924 billion in purchasing power.

Age: By 2002, the once-dominant youth market will have diminished. The number of U.S. households headed by people age 45 to 64 will increase to 37 million.

Education: In the not-too-distant future, kindergarten will start at age 3 and people will complete college at age 19.

Employment: The number of telecommuters has quadrupled since 1990.

Investment activities: Nearly 15 million adult Americans are now involved in online investing.

How will these variables affect your company? What impact will they have on:
• Product development
• Marketing and advertising programs
• Shareholder relations
• Community relations
• Customer relations
• Employee loyalty
• Recruitment and training
• Market value

To create your Reputation Forecast, I suggest you lay out a grid with each of your key variables on the left axis and “best case,” “worst case” and “expected scenarios” across the top.

Once you’ve filled in the grid, you can begin to detail your strategies for dealing with the consequences of each of those scenarios. The whole process will enable you to provide management with a tool that should be as helpful as a financial forecast.
I also recommend that you consider applying the Reputation Forecast looking out 3 years and even experimenting with longer-term visions.
Bottom line: The Reputation Forecast will enhance your management contribution. No, it is not easy to do, but most of you have already employed a similar approach if you’ve done any crisis or issues management work. What I’m suggesting is that you apply the principles more broadly. Why? Because in a world in which company value is a function of company reputation, and your reputation is at risk on a day-to-day, minute-to-minute basis - Face it! You are in a perpetual state of potential crisis.

There have been other, equally tumultuous times. Thomas Alva Edison, for example, lived through a period of tremendous change during the transition from the 19th to the 20th Century. In fact, his inventions (and his improvements on others’ inventions) helped to drive many of those changes. The stock market ticker, the electric light bulb, the telephone, the phonograph, storage batteries, cinematography ... he had a hand in them all. With the right mindset and the right tools, he reshaped his future, and ours.

Similarly, the Repucratic Revolution offers every one who has the vision and the passion to act, a chance to enhance the value of your organization ... and enhance your professional value to your company and its constituencies.