Reputation: The Inside Story

In a second Annual PE exclusive, Rating Research ranks companies on their Leadership, competitiveness, ethics, and more.
Jun 01, 2003

Even among industry insiders, company reputations are hard-earned and subject to change. Rating Research's (RRC) second annual Reputation Strength Study of the Pharmaceutical Industry surveyed financial analysts and industry senior executives to see how 19 companies stack up against each other and to see how their overall reputations changed from last year. (See "More than Numbers.")

Overall Reputation Ranking
On one hand, the industry sees itself quite favorably. On the critical behavioral measure "perception as an excellent company," industry executives expressed positive opinions about the vast majority of rated companies. Financial analysts gave even more favorable reviews than executives on half of the surveyed companies. However, the industry has one significant vulnerability: its low scores on the measure "personally willing to support in times of controversy." The essence of the measure that asked them how willing they would be to support the company in a time of crisis is whether executives would give a particular company the proverbial "benefit of the doubt" during tough times. Even Pfizer, the company with the strongest score in the measure, attracted the support of less than half the executives surveyed. It seems clear that the issue of developing greater support-indeed trust-needs to be a central focus for the industry going forward.

And, given the potentially turbulent times ahead, RRC believes that the industry's key players will benefit by treating overall reputation as a risk factor that they must manage. Reputation, and the intangible characteristics that constitute it, can be a vital asset-or a worrisome liability-as the industry confronts its challenges.

More Than Numbers
The Big Picture For a snapshot of the industry, RRC mapped each company into a quadrant matrix according to its Reputation Strength Score (RSS) and its "familiarity." (See "Outlook Matrix," page 42.) An RSS is the sum of executive responses to 37 reputation components, weighted by their respective importance to overall corporate reputation. Familiarity measures the extent to which a company's public relations, advertising, and product messages have been received by those individuals who are aware of the company. RRC then labeled the four quadrants, from highest reputation to lowest, "leaders," "next generation, "traditional," and "challenged." The subset graphic in the chart illustrates how reputation changes-both good and bad-from 2002 to 2003 moved seven companies from one quadrant to another.

This year, Merck, Pfizer, and Johnson & Johnson (J&J) dominate the "leaders" quadrant, consolidating their leadership positions. Eli Lilly and Novartis both moved into the Leaders group from their positions last year in the "next generation" and "traditional" quadrants, respectively. GlaxoSmithKline also moved squarely into the leadership quadrant from its borderline position in 2002.

Outlook Matrix and On The Move
Bayer moved out of the Leaders category, but the strength of its reputation kept it within striking distance of regaining that position. Bristol-Myers Squibb, after a string of issues relating to questionable patent protection strategies and dubious wholesale inventory practices, among others, also lost ground, moving from "leaders" to "traditional." On the positive side, Roche improved its reputation strength the most, and Novartis and AstraZeneca also made solid gains.

Most newcomers to the 2003 rating process fall into the "challenged" group. But the challenges facing Alcon, Allergan, and Forest Laboratories involve developing a positive and distinct reputation rather than having to correct a negative one. Forest, in particular, garnered significant "neutral" responses from industry executives. Amgen began its rating history this year in the "next generation" quadran

Compared with Last Year
The Process RRC's reputation rating process began by assessing two criteria. Based on a battery of 37 reputation components, subject to an in-depth analytic process, the first criterion explores the dimensions that emerge as most critical to driving reputation in the pharmaceutical industry. Eight dimensions emerged during last year's analysis, but this year's produced nine reputation dimensions. (See "Reputation Structure," page 44.) In descending order of importance they are:

  • competitiveness
  • ethical behavior
  • CEO leadership
  • financial stability
  • manufacturing process
  • social responsibility
  • employee retention
  • marketing effectiveness
  • charitable support

(See ranking charts throughout article.)

How They Rate
Each of those dimensions is made up of multiple components. Competitiveness, the most important, includes intangible characteristics such as management team talent, company innovation, sufficient investment in R&D, sales force effectiveness, and the ability to attract high-quality employees, among others. Given the issues the pharmaceutical industry is dealing with, it is not surprising that "ethical behavior" is the second most important dimension this year. It captures perceptions on values such as:

  • trustworthiness
  • adherence to ethical business practices
  • transparency of financial disclosure

(As a result of the increasing importance and scrutiny of ethical behavior across industries, RRC treats this area in more depth through its comprehensive Ethics Reputation Rating process. Those ratings and supporting information will be released in the near future.)

Reputation Structure
The third dimension, "CEO leadership" measures the ability of companies' executive managers. High performing companies are driven by high performing executives. This reputation dimension captures components such as clarity of the company's strategic direction, strength of corporate governance, its ability to form effective strategic alliances, and the effectiveness of the CEO's leadership.

On another level, the rating process examines five key behavioral and perceptual measures that capture, at a summary level, the strength of the "reputation reservoir" a company has established. They include respondents' perceptions of the rated companies on the following measures:

  • personally willing to invest in
  • personally willing to support in times of controversy
  • customers willing to pay a premium for its products and services
  • personally willing to recommend as a place to work
  • perceiving the company as "excellent" overall

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