A Matter of Reputation - Pharmaceutical Executive

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A Matter of Reputation
A new survey of pharma companies evaluates leading and lagging players-and identifies potential stars.


Pharmaceutical Executive

From Washington, DC, to company boardrooms to business schools, the debacle that led to the down-fall of Enron and Arthur Anderson has spawned a flurry of activity. The public outcry for greater management accountability has made cleansing big business of the excesses of the '90s a "mission critical" for many corporate executives. The situation reinforces one basic but important theme: Reputation matters.

US Federal Reserve Chairman Alan Greenspan noted that a company's perceived value, more than ever before, may depend on its "capitalized reputation," adding ruefully that both "trust and reputation can vanish overnight." Warren Buffet, who took over as chairman of Salomon Brothers during that company's reputation crisis, reportedly told employees, "If you lose money for the firm, I will be very understanding. If you lose reputation for the firm, I will be ruthless."

Indeed, reputation has a lot to do with trust, which in turn, inspires confidence in key constituencies-shareholders, employees, customers, suppliers, and regulatory agencies. And confidence among those groups is a fundamental precondition for successful business performance.

For the pharma industry, which faces more than the usual share of public scrutiny, Buffett's advice may prove as applicable as it was in the financial world. If the industry is entering a less robust cycle, as some experts predict, a strong corporate reputation will be one of the most valuable assets in a CEO's tool kit-as critical to business success as a healthy balance sheet.


Competitiveness
For that reason, Rating Research, a joint venture of the Ratrix Group and Opinion Research Corporation, decided to evaluate pharma companies' perceived reputation strengths and weaknesses. Using a broad range of criteria that are the cornerstone of any strong corporate reputation, as well as issues specific to the pharma industry, researchers conducted in-depth interviews with industry analysts and senior-level executives about 16 of the world's top pharma companies. This article reveals how each company stacks up against the industry's own criteria, highlights their strengths and weaknesses, and examines their prospects for the future.

What They Looked For The researchers based their assessment of pharma companies' reputation strength on two types of criteria. The first evaluated the companies based on a set of eight dimensions that contribute to business success. Companies that do well in the following areas tend, over time, to outperform those that do not:

  • competitiveness
  • marketing effectiveness
  • ethics
  • workforce/process
  • financial stability
  • social responsibility
  • strategic alliances
  • charitable support.

Second, the survey explored five key behavioral and perceptual measures that reflect the level of support a company has achieved as a result of its

market activities and the conduct of its senior management. These measures characterize interviewees' attitudes toward each company in question as:

  • willing to invest in it
  • willing to support it in times of controversy
  • willing to pay a premium for its products and services
  • prefer to do business with it
  • regard it as "excellent" overall.

Reputation Drivers Understanding the relative importance of one dimension versus another in creating a strong reputation is as critical as knowing the individual company performance scores on each dimension. Of the eight criteria that make up reputation strength, "competitiveness" carries the most weight in a company's being perceived as "excellent." Two key ingredients of that dimension are "offering innovative products and services" and "investing sufficiently in R&D"-both critical in creating a strong pipeline.


Marketing Effectiveness
The four companies with top scores for "innovative products and services" are Genentech, Merck, Johnson & Johnson, and Pfizer, in that order. The lead scores for "investing sufficiently in R&D," also in ranking order, belong to GlaxoSmithKline, Merck, Pfizer, and Genentech.

Following hard on the heels of competitiveness is marketing effectiveness, made up of at least four components:

  • effective corporate advertising, sales, and marketing
  • ability to respond rapidly to market conditions
  • ability to efficiently deliver products and services
  • a strong customer focus.

The winner is Johnson & Johnson, which earned recognition from about 80 percent of industry respondents for marketing effectiveness.

It is interesting that, although many consider the pharma industry to be responsive to market conditions, no one company was perceived as excelling in that component. A company that emerges strong in this regard in the future will improve its perception in the marketplace as a successful long-term player.

The third most important dimension in driving a good reputation is ethics. Its four components include

  • trustworthiness
  • ethical business practices
  • open and honest communication with the public
  • a good relationship with regulatory bodies.


Overall Reputation Ranking
This last dimension is particularly important, given the public's view that the pharma industry has a higher calling than just making money. The findings suggest that a company's ethical practices and its call to heal the sick cannot be abrogated by a focus on financial performance; that they are, in fact, critical to garnering support in times of controversy and warrant senior management's close attention. Industry leaders in ethical behavior are Johnson & Johnson, Merck, and Eli Lilly. Wyeth has the lowest rankings, followed by Astra-Zeneca and Abbott Laboratories. To better understand a company's negative ranking, it is important to examine the ethics components more closely. Although Wyeth ranks relatively low on all four components, it fares modestly better on two of them-business practices and relationship with regulators-demonstrating that its primary weakness lies in its communication with the public.

From the Top Down Two key measures offer particularly useful insights: a company's reputation strength score (RSS), which is a composite of the eight reputation dimensions, and its "excellent company" ranking, the most critical component of the five behavioral and perceptual measures. (See "Overall Reputation Ranking,"; the eight criteria that contribute to business success,; and the five key behavioral and perceptual measures.)


Behind the Numbers
Given Johnson & Johnson's historic marketplace behavior-going back to its bold decision to pull Tylenol from the shelves during the well-documented contamination crisis of the '80s-it is no surprise that it tops other pharma companies in overall reputation.

With Merck right on J&J's heels, the two emerge as reputation leaders, receiving the highest scores and leading the pack in overall excellence. In fact, more than seven of every ten industry executives give the companies high marks in that regard. Rounding out the top performing third of the companies in reputation strength are Pfizer, GlaxoSmithKline, and Genentech.


Ethics
Analysts are also favorably inclined toward Johnson & Johnson. One notes, "It has the best sales force and the most diverse product line. Investors call it their 'healthcare mutual fund.'" Analysts are less uniformly positive about Merck, with some noting that it faces several patent expirations that could limit improvement in earnings short-term. However, because of the company's historically strong R&D and product pipeline, they give it promising marks for the longer term.

Pfizer also gets high marks from financial analysts, who view it as the industry benchmark. One analyst summed up his assessment of Pfizer this way: "It has good critical mass, good breadth of portfolio, and a 'sell it' management," reflecting the general perception of Pfizer as an aggressive marketing machine.


Workforce/Processes
It's interesting to note that Genentech, ranking sixth on "excellent company," achieves "strongly agree" scores on this component that are about the same as leaders Johnson & Johnson and Merck. More important, Genentech ranks fourth on "willing to support in times of controversy" and first on "willing to pay a premium for its products and services." That not only puts Genentech among the top-echelon leaders but it also suggests that it has a core of enthusiastic supporters, a valuable asset in times of controversy as well as during the inevitable business expansion and slow-down cycles. In short, Genentech seems well positioned for growth.

Conversely, companies facing significant uphill battles-reflecting low reputation strength scores-include Abbott Laboratories, Pharmacia, Schering-Plough, Roche, and Wyeth. Those five, along with AstraZeneca, also rank at the bottom of the "excellent company" measure.


Financial Stability
Possible reasons for the low scores vary by company. Abbott is in the process of restructuring its business mix to increase its pharmaceutical revenue while de-emphasizing hospital supplies and device-related income. Manufacturing quality control problems have also diverted management's attention. That turbulence undoubtedly affects the company's overall reputation strength at this time.

Whatever the causes, such problems limit lower ranked companies' ability to develop new products and services, to charge a premium for existing products, or to be a "partner of choice" for strategic alliances. Given such negative assessments, those companies will need to work considerably harder than their peers to achieve similar levels of industry recognition and support.

Dimensions of Success All the companies surveyed are vulnerable to-or can profit from-changes in any one of the eight core building blocks of reputational strength. Some companies have a few glaring weaknesses or, conversely, some strengths that enhance their opportunities.


Social Responsibility
GlaxoSmithKline, for instance, performs well on critical dimensions such as competitiveness and financial stability, but it ranks rather low on strategic alliances and charitable support. Genentech, at the bottom on financial stability, ranks high on workforce/processes, defined as continually innovating work processes, attracting and retaining talented employees, keeping its workforce up to date, and treating employees fairly.

Bayer ranks high on strategic alliances and charitable support. Its historically strong record in this regard was reaffirmed recently by its donation of four million Cipro (ciprofloxacin) tablets to US emergency personnel during last year's anthrax scare. It also agreed to sell the government up to 300 million tablets at a special price to help fight the disease's spread. Pharmacia, though a lower-ranked company, comes in second on strategic alliances, reflecting its focus on partnerships for growth. But only J&J ranks first or second in every one of the eight key behavioral measures-the hallmark of a true industry leader.


Strategic Alliances
Industry Pluses and Minuses Senior pharmaceutical executives and financial analysts who participated in the survey view the industry as a whole in a positive light, giving it relatively high reputation scores in most dimensions. Most important, they believe the industry is financially stable and that it takes a thoughtful, conservative approach on fiscal matters.

Despite pharma's many positive attributes, however, it displays significant vulnerability in one key area: "willing to support in times of controversy." No one company-not even the powerhouses-garners strong support here, and several received a relatively large number of negative responses, suggesting that they may be susceptible to negative publicity arising from product failures or adverse regulatory developments. Abbott Laboratories and Roche are particularly weak, and would find little political support in the event of a major setback. Perhaps more surprising is Pfizer's seventh-place ranking, despite its strong showing on most other factors.


Charitable Support
Given pharma's high public profile, the low overall scores for the support criterion could be a result of the negative press it regularly receives on issues ranging from product recalls to accusations of excessive profits. Whatever the reasons, the public's strong critical feedback reinforces the wisdom of creating a wellspring of reputational good will programs to help weather the inevitable storms.


"Willing to Invest In"
In fact, reputation strength may prove equally important during transition periods. Many companies are undergoing significant shifts in senior management, largely through mergers. They also face an increasingly cautious FDA. Furthermore, many significant products are about to go or have gone off patent. In light of those developments, plus a slowdown in the introduction of new blockbuster drugs, a positive reputation for both the industry and its individual companies can provide a supportive cushion for more difficult times.

On the positive side, executives show respect for many of their competitors by their willingness to invest in those companies. Pfizer does particularly well on this dimension. J&J and Genentech, respectively, also fall into the top companies in this category.


"Willing to Support in Times of Controversy"
At the other end of the spectrum, Roche, Abbott, and Schering-Plough trail the pack on "willing to invest in." All three received significant "disagree" scores, indicating a lack of confidence in their long-term growth prospects and well-being. The companies that rank low in this regard do so for a variety of reasons. In Roche's case, its share structure gives control of more than 50 percent of the voting stock to the families of the company's co-founders, limiting the impact that outside shareholders can exert over corporate decisions. As for Schering-Plough, it has not produced a blockbuster in years, and its pipeline is dry.

Stars of Tomorrow The researchers based each company's prognosis for the future on its reputation strength score, as well as how familiar industry executives are with the company. A high degree of familiarity is a necessary precondition for companies to achieve a significant level of industry leadership. (See "Future Outlook," bottom.)


"Excellent Company"
Positioned squarely in the leaders category are Johnson & Johnson, Pfizer, Merck, and Bayer. This quadrant of the matrix is characterized by industry recognition for strong performance on the key dimensions of RSS and a high degree of familiarity with industry executives. Although such characteristics are no guarantee of future success, these four companies are in a good position to leverage their strengths and further their business goals.


"Prefer to Do Business With"
In the opposite quadrant are the "challenged" companies. Respondents perceive them as falling short in the basic elements of long-term business success and falling below the industry norm in executives' familiarity with the company. They include Roche, Pharmacia, AstraZeneca, and Aventis, with Roche having the lowest reputation strength score but the highest on familiarity in this quadrant. Pharmacia, AstraZeneca, and Aventis all match up on familiarity, but Pharmacia has a lower reputation score. To achieve long-term success, it is imperative for these companies to address their reputational deficiencies.


"Willing to Pay a Premium For"
In the "traditional" quadrant are Novartis-on the cusp of the "leaders" quadrant-as well as Wyeth, Schering-Plough, and Abbott. Although the latter three are familiar to survey participants, their position in the matrix indicates they have considerable distance to cover if they wish to capture a position of market leadership. Senior executives' placement of Wyeth in the "traditional" quadrant contrasts sharply with financial analysts' opinions, reflecting the analysts' tendency to focus more on short-term profits.

Taking the Offensive In today's business environment, it is likely that pharma's senior management will focus more and more on a substantive corporate reputation to build a foundation for marketplace success. A strong reputation can also provide a credible defense against events that may otherwise have a negative impact.


Future Outlook
Leading pharma companies will heed the advice of Professor Stephen Greyser, world-renowned marketing expert at Harvard Business School, who believes that reputation can be a long-term building block in company strategy. Based on his own research and extensive experience with senior corporate leaders, he says companies must actively establish, nurture, and preserve their reputations as part of management's mission and accountability. Where reputation is concerned, says Greyser, "the CEO is the ultimate custodian."

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