Shuba: Related to risk, finance managers would say “diversify.” Can we apply the concept of diversification to managing branding risk?
Patrick: In finance, risk is a tool to adjust return. The risk can be calculated fairly easily and can be reduced through diversification. Developing a new brand requires massive investment in a wide range of activities, and the likelihood of returns is therefore much more difficult to calculate accurately. On that level, you can’t diversify risk in the same way. You can for narrow ranges of actions like in digital advertising or for TV ads that directly sell a product, but not on a higher level. It’s very hard to diversify “marketing risk.”
Susan: What can managers do to manage conduct risk in such a charged environment?
Patrick: Corporate Social Responsibility (CSR) efforts address components of conduct risk in a positive way, and it is partially replacing some marketing communications that would normally be assigned to brands. The Kraft Heinz Company is, for instance, expanding their CSR programs and I think it is a very beneficial concept for them.
Susan: So, CSR is a preemptive strategy against conduct risk. Which other risk management strategies could be applied?
Patrick: At MSA, we focus on socio-economic risk and have developed a measurement methodology and profiling process to create a brand risk score card. We have three different measurement areas for which we develop corporate scores, which we compare to benchmarks. Specifically, we cover corporate demographics, socio-economic issues the brand is exposed to and previous experience with brand risk events at the company itself and in its industry. We evaluate the visibility and threat of risks that rate very highly.
Shuba: Measuring risk is obviously part of the answer. What do you do next?
Patrick: In workshops, we create higher-level strategies to preempt or to address risks or to provide alternative marketing approaches that counteract the risks. We include scenario planning for different types of risk exposure. We provide customized real-world examples of the subject’s company that show how they can be victimized by activists or boycotted and more. Additionally, we provide threat- and opportunity-monitoring so risks can potentially be identified early. Overall, we deliver actionable market intelligence which reduces brand risk. We believe “readiness” is an important aspect of this; being able to respond to a brand crisis is critically important.
Susan: Who is participating in these workshops? Is marketing responsible for managing brand risk?
Patrick: We work primarily with senior executives. This would include CMOs and senior marketing staffs, of course. But we also seek to include financial executives and CFOs and investor relations senior staff. Sometimes it’s difficult to implement a risk concept in a marketing environment alone and the client company can get more traction when there’s a broader involved consensus. Financial executives can really help because they are generally familiar with risk management concepts. Also, they are responsible for reporting revenue numbers to boards and therefore want the marketing numbers to be right and balanced.
Susan: Why is there this gap? How could we get traction with the marketing audience?
Patrick: I think it will be increasingly common to include brand risk exposures in SEC disclosures, and this will help. Selectively, some aspects of brand risk, like reputation risk or social media risk, are already included in SEC 10-K reporting, but it is not yet widely common. Marketing has traditionally been focused on revenue growth and very discipline-specific metrics like CPMs, share of voice, click-through rates, CPIs. Maybe it’s the different language. But in a slow and no growth environment, senior executives are really seeking ways to better understand risk exposure. CEOs don’t want to take unnecessary risks, and this will increase traction for a proactive and extensive risk management approach in marketing departments.
Shuba: Are marketing people capable; are they trained in performing risk management for their brands?
Patrick: Most companies lack staff that perform and research brand risk. Generally, we need qualitative acknowledgment that spending millions on the launch, advertising and distribution of a new product entails identifiable risk. At the moment, brand risk management isn’t directly covered in MBA marketing programs. I think academic coursework that goes beyond crisis management and addresses how to prevent brand risk damage would enable expert-level discussions on these types of risk.
Susan: As final advice, could you briefly outline the steps that companies should take to manage brand risk in a proactive way?
Patrick: At MSA, we recommend four steps. First, companies need to assess the potential for brand risk in a benchmarking process and find the right metrics to see how their risk profile compares to peer group companies. Second, internal marketing process audits should be performed to identify process gaps and to find solutions; also there can be intensive workshops with different staff from different disciplines within the organization to create a shared understanding of these risks. Scenario planning is the third step and includes creating processes for response readiness for possible risk events. And fourth, we need to establish brand risk monitoring and implement tools like social media listening and media screening so that some early warning signals are available to managements.
Susan: Thanks so much, Patrick, for sharing your view on the changes in our society and on how that makes branding riskier and more challenging.