MISSION INTANGIBLE

M:I Products

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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P&G looks forward

Nir Kossovsky - Tuesday, October 13, 2009
Procter & Gamble (NYSE:PG) serves four billion of the world's seven billion consumers with products comprising one of the strongest portfolios of trusted, quality, leadership brands. The have consistently scored in the top tenth percentile of the Steel City Re Corporate Reputation Index. The Financial Times’ Newssift sentiment metric reports that of the 218 news stories mentioning P&G’s reputation this past year, favorable stories outweigh unfavorable by a ratio of 8:1.

Brands are material to the Company. According to the 2009 annual report,

P&G is the brand-building leader of our industry. We’ve built the strongest portfolio of brands in the industry with 23 billion-dollar brands and 20 half-billion-dollar brands. These 43 brands account for 85% of sales and more than 90% of profit. Twelve of the billion-dollar brands are the #1 global market share leaders of their categories. The majority of the balance are #2. As a group, P&G’s billion-dollar brands have grown sales at an average rate of 11% per year for the entire decade.

In view of the above, and with a price to book ratio of 2.7, the lion’s share of the Company’s value comprises superiorly managed intangible assets. We felt therefore it would be instructive to see how this Company discloses its financial risks. In this basic analysis, we looked at the boilerplate blue sky Forward Looking Statement that trails any financial announcement in compliance with the Private Securities Litigation Reform Act of 1995. In our analysis, we looked at the 15 enumerated items that represent “certain factors that could cause actual results to differ materially from those anticipated” by the financial announcement, and we analyzed each to determine if the risk involved a physical asset or an intangible asset (business process).

This is what we found. Of the 15 enumerated risks, 14 centered on intangible asset management. The lone physical asset risk was the Company’s IT system. Among the 14 business process risks, we found three references each to the business processes of sales, marketing and supply chain management. We found two references each to innovation, intellectual property, finance processes, and business processes in general. Last, we found one reference each to brand management, human resource management, and geopolitical risk management. Reputation risk is specifically noted. Interestingly, and consistent with our observation that only risk managers look at the world from a risk perspective, is that the descriptive language of the risks comprised neutral-to-positive managerial verbs rather than disastrous end-state nouns.

From the above, it appears that even in risk management, a superior intangible asset manager such as P&G focuses on executing the business processes that are central to its enterprise value. And given their a 170 year history, perhaps this is their intangible secret to longevity?

Government motors, not! (and we'll prove it)

Nir Kossovsky - Friday, October 09, 2009
Ninety days ago today, on 10 July, General Motors (fomerly NYSE:GM) emerged from bankruptcy. At an auto show this past weekend, Robert Lutz, the ‘new”  General Motors vice chairman of marketing and communications, said, “The world does not realize how great today’s GM products are." Lutz said GM is not afraid to back up those comments. He is heading the team that has started a new “may the best car win” ad campaign, “Our products are equal or superior to the competitors.”

While some members of our Society may know much about cars, as a group we share common interest in the concepts of quality and reputation, and we recognize that communications are an integral step in the process by which stakeholders form impressions that culminate in a company's reputation. In view of Bob Lutz's challenge, we thought it would be interesting to baseline business sentiment in the media covering the Automotive sector. As before, we use use the Financial Times' Newssift engine for the sentiment analysis.

We searched for articles in the business press covering both reputation and one of these five automobile companies: General Motors (GM), Ford (NYSE:F), Toyota (NYSE:TM), Honda (NYSE:HMC), and Daimler (NYSE:DAI). We broke down the data into the 90 days prior to GM's emergence from bankruptcy, and the 90 days following, and using the Newssift engine, sorted articles by sentiment: positive, neutral, or negative. Here are the results.

With respect to business press articles that had a positive angle, GM and Daimler showed little change. Positive articles comprised about 1/3 and 1/2 of the news stories, respectively. Positive articles about Ford and Toyota increased from about 1/3 to nearly 1/2. Positive articles about Honda dropped from nearly 1/2 to less than 1/4, although the total number of articles about Honda in each case, 25, is small compared to the total of 1139 articles analyzed.



With respect to business press articles that had a negative angle, GM and Daimler again showed little change at around 20% and 11% respectively. Negative articles about Ford dropped from 25% to 13%; they rose for Toyota from 13% to 20%. At Honda, they remained the same at 4% which represented only one article for each period. For those of you keeping score in the reputation sweepstakes, the current winner following GM's emergence from bankruptcy is Ford.

 

Turning now to the economic returns over the 180-day period, looking at the chart adapted from BigCharts.com, so far Ford is leading with an ROE of about 70% followed by Daimler at 40%. The S&P500 is up about 20%. As they say in the business, the race is on. And as Bob Lutz says, may the best car company win. Stay tuned.

New fundamentals

Nir Kossovsky - Monday, October 05, 2009
Nell Minow, editor and co-founder of the Corporate Library, a provider of corporate governance research, ratings and investment risk analysis, penned a Financial Times op ed piece on 2 October suggesting that going forward, fund managers and analysts will look at four new fundamental elements “that will become as important as cash flow and return on investment.” To no surprise around here, these four comprise intangible asset metrics and business processes. While we do not necessarily agree with Minow's views, her comments are worth noting. This is what she wrote, briefly:

1. Accounting: Investors will demand better information about human and intellectual capital, risk management processes, and sustainability. Our friend, Ken Jarboe of the Athena Alliance, has been delving into this topic for years. You can link to the Athena Alliance here.

2. Boards of Directors: Investors will demand greater competence and selfless engagement from members of the Boards of their companies. They will want from Directors what private equity firms demand of early stage company executives: "skin in the game." This notion compresses to the concept of Governance, about which the Society has organized a Committee chaired by Cathy Reese. Without leaving with us a pound of flesh, you can download her 6 Feb 09 "how to" presentation on this subject from our Events page.

3. Compensation: We read Minow’s comments in this light: executive compensation must better align the interests of senior management with the long-term interests of the firm and its stakeholders. Compensation processes, writes Minow, are a key indicator of risk. While we still see benefits in incentives and material compensation, notwithstanding the growing chant of mobs with pitchforks, we like the part in Minow's piece about processes and risk management. In fact, we like anything that links risk management to overall corporate reputation. This is especially when a company uses financial instruments to signal superior risk management. The Society presented a Mission:Intangible Monthly Briefing on Risk and Reputation Management 10 July 09 that you can download from our Events page.

4. Investors: Going forward, investors will look to see if the existing investors are providing sufficient oversight to ensure that the Board of Directors is providing sufficient oversight to ensure that management is providing sufficient oversight of the firm’s operations. Did you follow that? The business process is oversight; the intangible asset affected is trust. To us, the take home message is this. The greater the trust (a product of transparency), the less oversight burden for all. And how can investors signal trust? According to Minow, investors can signal trust by being "overweight relative to the index." In other words, extra skin in the game. See #2 and #3 above. 

The bottom line is this. Investors will seek companies that have their business processes under better control, can quantify and report the value of these proceses to their stakeholders, can manage their risks, and can signal their material conformance with the preceding  through non-traditional channels. The Society provides a working environment for best-practices discovery for executives seeking to accomplish the above. Won't you join us?

Monetizing the CEO

C. HUYGENS - Tuesday, September 29, 2009
In the world of intangible asset management and value, there are those who argue that the CEO's reputation is the main driver of corporate intangible asset value. We touched on this a few weeks back in the context of Whole Foods and their outspoken CEO, John Mackey. While we agree that the CEO alone can impact reputation-linked value, the magnitude is often far less than might be expected.

The Chicago Tribune posted a recent story titled: More CEOs cast themselves in company commercials: Corporate commercials: GM, Walgreens, Sprint put executives on the air, but effect is debatable. The short article includes a quote from Jon Baskin who spoke at our 2008 Fall Conference and is worth a read. We thought we would cut to the chase on motivation. The Tribune reports that "GM is trying to resurrect its image after a trip through bankruptcy court and a government bailout. Walgreens is undergoing a marketing makeover as it aims to return to steady profit growth. And Sprint is attempting to stem the loss of subscribers." The two year equity returns, shown below, speak volumes.



In the chart above, General Motors (NYSE:GM) is blue, Sprint-Nextel (NYSE:S) is in red, Walgreens (NYSE:WAG) is in black, and the S&P 500 index is golden yellow. We have looked at both General Motors  and Sprint  in the past and noted significant reputation losses. We have also shown in our forthcoming book, Mission:Intangible, that the business processes driving quality, integrity etc. are the primary sources of reputation value. The role for the CEO is to champion value-creating best intangible asset management practices.

But, fundamentally, we are empiricists, so we'll return in a few months to gauge effectiveness of the "CEO as brand" strategy.

It's personal

Nir Kossovsky - Thursday, September 24, 2009
During the 6 February 2009 MISSION:INTANGIBLE Monthly Briefing, Fish & Richardson’s Cathy Reese, who chairs the Society’s IA Corporate Governance Committee, indicated that under Delaware Law, Directors and Officers had a Duty of Care to oversee the management of the business processes that help establish reputation. She noted that absent oversight systems, Members of the Board could be personally liable to shareholders for adverse events that impaired a company’s reputation.

Cathy’s warning of shareholder-driven exposure is just the beginning. Now companies are seeking restitution, too. According to the newspaper Deutsche Welle, after spending nearly 2.5 billion euros to cover legal bills and fines stemming from an international bribery scandal, Munich-based Siemens AG (NYSE:SI) is seeking payments from its former leadership team. Siemens was investigated for paying 1.3 billion euros in kickbacks between 2003 and 2006 to potential buyers in 12 countries, including Italy, Greece, Russia and Nigeria. In Germany and in the United States, the company was found guilty of corruption and ordered to pay combined fines of just over a billion euros. After the 2006 investigation, Siemens then accused some of its former managers of having failed to stop illegal practices and wide-ranging bribery.

It gets more interesting. The Financial Times reports that some of Siemens’ investors have threatened to sue the company if it did not claim damages from its former managers.

The value of risk and reputation management at the board level should be painfully obvious. The consequences of failing to manage a firm’s business processes for ethics, sustainability, innovation, quality, safety, security, etc. – the drivers of reputation – can place officers and directors at great personal peril. Yes, it’s personal.

Get a second life

Nir Kossovsky - Tuesday, September 22, 2009
From IP 360, the legal newswire, we share the following: "Two makers of virtual clothing, sex toys and erotic animations for sale in the online alternative reality game Second Life have slapped the game's maker with putative class action allegations of trademark and copyright infringement, saying the company allows piracy of their products to run rampant in Second Life and even profits from it."

The Intangible Asset Finance Society takes interest in this IP issue. We are intrigued because virtual sex toys and erotic animations are unambiguous examples of intangible assets and because the alleged millions of dollars at stake comprise a material level of finance.

We quote from the legal blog, Above the Law: "We’re intimately familiar with neither Second Life nor sex toys, but our understanding is that the two go hand in hand. Eros LLC, a virtual sex toy maker, has apparently made a pretty penny selling sex goods in Second Life. But now other Second Life vendors are ripping off its designs and selling knock-offs. Eros’s CEO Kevin Alderman — who goes by Stroker Serpentine in Second Life and built the first in-world sex bed, a digital bed with built-in sex position animations — is filing a class-action suit against Second Life’s creators for enabling this virtual counterfeiting. Alderman, who has been called “the ‘Hugh Heffner’ of the digital millennium,” wants Second Life to shut down its virtual version of Canal Street (counterfeit central in New York). "

The working elements of the Society are its standing committees that address areas of intangible asset finance practice. We asked Darren Cohen, Chair of our Quality & Integrity Asset Management Commitee, and partner in the Intellectual Property Practice Group at Reed Smith, to give us the "inside baseball" view of this case. We also asked David Ruder, Chair of our Trademark Asset Management Committee; VP, Business Development, at RPX; and a founder of Terrier IP Investments, LLC, a private investment firm focused on intellectual property-based investments in firms backed by hedge funds and private equity, for his perspective on asset monetization.

First, Darren's perspective:

At first glance, this case challenges accepted notions of intellectual property infringement. For example, under established trademark law, infringement arises when there is a likelihood of consumer confusion among the relevant purchasing public. On this basis, a plaintiff in a trademark case may likely claim damages based on lost or diverted sales, which seem on its face to be anathematic to the use of trademarks, copyrights or other intellectual property on Second Life.

However, it is undeniable that the Second Life population and the "real" life population overlap, and behavior in one medium can surely have an effect, adverse perhaps in this case, on the other. Indeed, reputation and risk management is just as vital in these nontraditional venues as they are in the ordinary course of trade (the standard for bona fide trademark use in commerce). This type of activity may further prevent one from being able to fully exploit IP rights and build IP equity, in particular brand equity, by weakening, diluting and tarnishing trademark rights or serving as a barrier to potential licensing opportunities and avenues. It should not be lost on any holder of IP rights that real profits are being made in forums like Second Life, and whether or not a rights holder wishes to enter these untraditional and "secondary" markets, they should have the same enforcement and exploitation rights, as well as brand and reputation control, as in any other channel of commerce. 

Second, David's perspective:

When I look at trademark rights, the perspective I usually take is a financial one: whether I can acquire the relevant trademark and create licenses across territories and different classes of goods and services and make money. To put this in relief, consider a hypothetical brand licensing campaign by Eros LLC that wants to license out its “SexGen” brand of virtual sex toys to the “real world” in multiple countries or even to a company that wants to sell SexGen sex toys in the Second Life world. If I were a potential licensee one of the questions I would pose to Eros is what trademark rights Eros actually possesses.

To defend its assertion that it owns trademark rights, Eros would point to its US Federal trademark registration 3,483,253 which covers “providing temporary use of non-downloadable software for animating three-dimensional characters.” What is interesting is that in the goods and services there is no mention of “sex toys” at all. In fact, this is in fact a broad description of software. Interestingly, given some recent caselaw this registration may be considered overbroad and thus cancelled if it the statement of use should have been limited to just sex toy software downloads. I have not done research to see if Eros has made non-US trademark applications and in the United States, but Eros did include a specimen of use including a Second Life screenshot to obtain its trademark registration and trademark registrations are presumed to be valid.

From a territorial standpoint one would ask whether Eros has any rights to its trademarks beyond the United States. Again, I don’t know if Eros has secured any non-US trademark registrations. I don’t know if SexGen’s use on servers outside the United States satisfies use requirements to establish rights in other countries. I also don’t know if use is satisfied by consumers on their US computers accessing non-US servers or non-US computers accessing US servers. As a potential licensee, all I have to go on thus far is the US trademark registration and the use on the Second Life game. Based on trademark law as I know it, if the registration is valid, I would think that Eros has the rights for SexGen not only in Second Life, but also any other virtual world that might be created by any software company. I might consider licensing the SexGen trademark for other virtual worlds, but thus far I think I would only have US protection.

From a goods and services standpoint, it seems at first blush that Eros has established no trademark rights at all to any actual real world sex toys as everything so far has been limited to just software as described in the registration. I would not be comfortable as a potential licensee that I should invest resources to create a real world SexGen sexy toy line via license unless there was some concrete evidence that the SexGen brand is used on real life sex toys or that there is actual confusion among consumers of real life sex toys and virtual sex toys as to source. Again I think this trademark really only would cover software.

If I were to challenge the rights of Eros, I would address the question of how “commerce” is established by Eros in the Second Life world and whether it meets the threshold of use in commerce under trademark law. I don’t know if Eros has made any kind of concessions via license agreement or otherwise to Second Life in its ability to log into the Second Life servers and create its virtual sex toys using Second Life software and servers without giving its rights away. What kind of “commerce” is occurring here and how exactly is Eros paid for offering its software services (and who actually pays Eros)? These are very fact-specific determinations that go to the heart of why trademark rights are granted for any kind of product or service.

Assuming Eros can prove that it has direct relationships with end users that knowingly pay Eros money for use of the virtual sex toys or that Second Life knowingly agreed to a mechanism whereby Eros is paid for its virtual sex toys, then I think Eros has a strong case that it has established trademark rights and these likely have value. It would be especially valuable for Eros to prove users have knowledge of the SexGen brand outside of the Second Life world. For instance perhaps rights can be purchased through eBay.

So far I’m leaning in favor of Eros having valid trademark rights but I would not be comfortable licensing the SexGen brand for anything at this point because I think the rights are in flux and a court needs to make a ruling about what rights actually exist at this point, if any. Even if a court affirms that Eros has rights in the Second Life realm, if I were Eros I wouldn’t be hoping for much compensation unless it can somehow enjoin Second Life from selling virtual sex toys (or if it has broader coverage, the Second Life software altogether). Second Life could simply respond by programming away sex in its world altogether (opening a new branch of virtual anti-trust law, I’m sure). 

Fast lane

Nir Kossovsky - Thursday, September 17, 2009
As he made his way here to Pittsburgh, home of the Intangible Asset Finance Society, to address a gathering of union leaders on Tuesday, US President Obama stopped by a General Motors plant in Ohio, where he said the government’s intervention in the automobile industry “may not have been popular,” but helped jumpstart the struggling sector. Let’s take a closer look at the sector from the Society’s perspective.

Let's first look at the reputation metrics from the Steel City Re IA (Corporate Reputation) Index? from 22 April when we last looked at this sector. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

At that time, Ford (NYSE:F) showed a rising IA index and decreasing EWMA IA Index volatility with a final log magnitude of 2 while GM (NYSE:GM) showed opposite directional movements and a final volatility log magnitude of 3. From these data, we projected great financial results for the former, and ongoing dismal financial results for the latter.  Honda (NYSE:HMC) was our highest ranked automotive firm on 22 April.

Let’s see how those financial projections panned out as demonstrated in these graphs from BigCharts.com.



Since April, Ford has returned nearly 100% on equity; GM has lost nearly 65%, and Honda (which had returned 45% for the year until 22 April) still had some firepower left and continued to move upwards, but underperformed the S&P500 for this period.



If we take the long view of a 2-year return, Honda just barely beats Ford but is in negative territory; both outshine the S&P500 which is about 30% off from the 2007 peak, and GM is, well, "underperforming."

Let's wrap this up with an homage to reputation management. Kudos to Ford for demonstrating the power of reputation mangement, and its ability to create value on the basis of expectations of further great things to come. This type of financial result is exactly what the Society seeks to promote. And kudos to Honda for demonstrating the power of a superior reputation to forge resilience. This type of financial resilience is exactly what the Society hopes will motivate companies to exercise best practices in the management of their intangible assets.

Photo finish

Nir Kossovsky - Tuesday, September 15, 2009
The objectives of the Intangible Asset Finance Society are to increase the visibility, transparency, and value of intangible assets through education, advocacy, and the promulgation of standards. Leverage is a common instrument of value deployment, and IP as collateral is one of several favorite topics among Society members. Which is why we couldn't pass the opportunity to share this note on an IP secured loan-gone-bad.

Celebrity photographer Annie Leibovitz, who has photographed everyone from the Rolling Stones to Queen Elizabeth II, put her art, intellectual property and even real estate assets up for collateral last year when she consolidated her massive debts into one $24 million loan.  Leibovitz made her creditor an “irrevocable, exclusive agent” in December 2008 in exchange for the loan at a 12 percent interest rate. The collateral specifically included all photographs she has taken or will take.  Last Tuesday was the deadline for repaying the loan or surrendering the collateral - a deadline not met.

Friday, Bloomberg reported that Liebowitz bought back control to her photographs and real estate by renegotiating the terms of a $24 million loan from Art Capital Group. In return, the lender dropped its lawsuit against her.

Table or menu

Nir Kossovsky - Thursday, September 10, 2009
Financial players are salivating over opportunities in the Food Products sector following Kraft Foods’ (NYSE:KFT) unsolicited $16 billion for Cadbury PLC (NYSE:CBY). According to Kraft’s CEO, Irene Rosenfeld, "We are eager to build upon Cadbury's iconic brands and strong British heritage through increased investment and innovation." Sounds to us like a reputation (brand) and intangible asset (innovation) opportunity.

So now that the sector is in play, we thought we’d look back over the past year and see how our predictions for value creation panned out. After all, when mergers and acquisitions are all the rage, if you are not at the table, you are on the menu.

Our last look at the Food Products sector was April 14 and was motivated by the sudden decline in the reputation standing of the HJ Heinz Company (NYSE:HNZ) as measured by the Steel City Re IA (Corporate Reputation) Index. The Index, which correlates with reputation surveys such as those published by Forbes, Fortune, and Harris Interactive, captures the financial implications of stakeholder behaviors and expectations of stakeholder behaviors as determined by corporate reputation. The Index is a good leading indicator of financial performance and returns on equity.

Six months ago, the top dozen ranked companies in the Food Products sector, according to the Index, included Heinz and Cadbury. Kraft was number 17. Here is our recap of the baker’s dozen with market value as of the close of the markets Friday 4 September before Kraft's announcement.



Heinz, a company that was highly ranked in March 2009 but caught our attention because of a sudden drop in its reputation standing, underperformed the balance of the baker's dozen over the full year with a disappointing -24.5% ROE. Kraft, which lost only 11% over the year, outperformed Cadbury which lost 16.5%.  Firms that had a higher reputation ranking in March 09 slightly outperformed their peers. The correlation between rank and six month return was 16%. The top 12 firms, in a demonstration of reputation resilience, outperformed both the S&P Index and the Food Sector index with a loss, as a group, of less than 1%.

One other reputation note. Kellogg and Cadbury, both firms with strong reputation rankings and exceedingly strong brands, reported quality issues related to melamine and salmonella. We know that the impairment of reputation-linked assets such as quality have brought down companies from all sectors. We wonder, for the record, if business process challenges were responsible for making Cadbury an appealing target?

Note added after original posting:

Comments received after posting from readers of MISSION:INTANGIBLE focused on the relatively short window in which we reported economic results. The readers rightly pointed out that the Food Products sector is a long-term business. Tastes may evolve over time, but the business processes associated with delivering tens of millions of safe, quality meals reliably and repeatedly demand eternal vigilance. Consistency is the watchword, and therefore long-term financial results should be included in any discussion of reputation.

We agree. Below, the ten-year returns of the Baker’s Dozen listed above less Campbell’s soup (CPB) due to space limitations. Highest returns: JJSF; lowest returns shown KFT. The only major Food Products sector firm from our top 12 (sector rankings for reputation as of April, ’09) to underperform the S&P500 (10 yr equity return -20%) was CPB (not shown). Prices not adjusted for dividends.


Dominating Dominos

Nir Kossovsky - Tuesday, September 08, 2009

Copious amounts of ink and countless electrons have been deployed in the debate over the commercial impact of social media. The debate? Yes, there are contrarians such as Jon Baskin, a speaker at our 2008 fall conference, who discount much of the power attributed to social media venues like Facebook and Twitter. While wary, we are slowly being persuaded.

Consider the case of Dominos Pizza (NYSE:DPZ). In late May, we analyzed the affair where employees of a franchisee disparaged Domino’s reputation through YouTube. In short, they challenged the quality of the product. In as much as quality is a life-supporting intangible asset, we saw this as a reputation body blow; and so did a good part of the mainstream business media.

We were wrong. We succumbed to conventional wisdom, when we should have equivocated. After all, the Steel City Re Corporate Reputation Index reported a steady climb in Domino’s reputation ranking for the preceding 8 months indicating the potential for outperformance going-forward, or at the very least, some degree of resilience. The index beat our gut instincts.

In our May 27 note, we compared Dominos to the three highest ranking firms among 47 in the Restaurant sector, Panera Bread Co. (NASDAQ:PNRA), McDonald’s Corp. (NYSE:MCD), and Chipotle Mexican Grill Inc. (NYSE:CMG). To appreciate our error with respect to Dominos, we revisit their economic performance of all four since 11 May, a few days before the YouTube affair.

As shown in the chart pasted from BigCharts.com below, Dominos suffered a 10% market cap drop in the period immediately following the affair (red arrow). Trading volume surged. Then there was a rebound as the Company rolled out an aggressive and effective campaign to restore its reputation. And the metric for success? Its returns beat those of two of the three most highly ranked firms in the restaurant sector from that period.



While many might attribute the rebound to excellent marketing, the Society would posit that Dominos' reputation resilience was evidence of substantive business processes that drive quality, and a communications effort that allowed stakeholders to appreciate its value.

What are those quality processes? They are systems that improve managerial motivation, provide time for managerial oversight, and technology that enhances quality while reducing opportunities for adverse human intervention - malicious or otherwise.

Dominos' greatest reputation risk lurks in an among the employees of the franchisees. Its strategy to mitigate that risk comprises two creative HR-focused processes. First, it requires that every franchise owner be 100% committed to the business -- no outside (distracting) revenue opportunities. Dominos wants the fortune of its franchise owners to depend on the success of the franchise. Second, it provides vertically integrated dough manufacturing and supply chain systems that allow the franchise owner to dedicate more time to human resource management rather than engage in “back-of-store” activity typical of the industry. Then there is innovation and technology. Dominos is constantly innovating process and system improvements to increase quality: the efficient, vertically-integrated supply chain system described above, a sturdier corrugated pizza box and a mesh screen that helps cook pizza crust more evenly; and the Domino’s HeatWave® hot bag, which was introduced in 1998, that keeps pizzas hot during delivery.

In summary, Dominos showed reputation resilience because it understands that its value is tied to the quality of its product. Dominos also showed that it understands well that its reputation for delivering a quality product can be protected through business processes and systems.


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