Case Project

Chapter 2 – Managing Public Issues and Stakeholder Relationships

In the Chapter 2 lecture notes, we cover the following topics:

Discussion of public affairs management The concept of environmental scanning Description of the external environment Managing the external environment

PUBLIC AFFAIRS MANAGEMENT Public affairs management is the active management of the company’s external relationships. External relationships are all things external to the company such as suppliers, competitors, governments, the media, the public, and so on. Much of public affairs is communications between the company and the many external groups just mentioned. (Note that, in most companies, external relations with customers/ consumers are handled by the marketing department.) It is recommended that companies manage their communications and dealings with outside groups, not just react to outside pressures. Certainly Johnson & Johnson / McNeil, the maker of Tylenol, did a much better job managing the arsenic crisis (1982) than Merck did handling the Vioxx crisis in about 2004 (arthritis medicine that may or may not have a side effect of causing heart problems). But, Johnson & Johnson seems to have done an incredibly poor job managing the more recent crisis (2011) of Tylenol having a moldy smell. ENVIRONMENTAL SCANNING One way to keep in front of potential problems or opportunities is to identify public issues that may require attention and action. Continuously analyzing the external environment provides leaders and managers with the information necessary to make effective decisions. Pfizer, for example, heavily advertised Celebrex, a similar drug to Vioxx, when Merck’s Vioxx was being withdrawn from the market. When making Celebrex business decisions, hopefully, Pfizer managers considered what would

happen to Pfizer if future medical trials showed that Celebrex creates some of the same side effects as Vioxx or other side effects equally as worrisome. The Volkswagen emissions scandal is an incredible story of profits over environmental concerns. The massive Takata air bag recall has caused the company to file for bankruptcy. The US Food and Drug Administration (FDA) recalls drugs. In some cases, companies suppress early indications of a problem, but, in the end, have a bigger problem. Why, because the company could have fixed the problem during the early warning period and not had a massive issue later. Sometimes, current managers need to deal with mistakes of previous managers, and this can be very difficult to do. EXTERNAL ENVIRONMENT Each textbook seems to divide the external environment into different groups or factors. Our text covers numerous external environmental factors including:

Competitor Customer and demographic trends Economic Geophysical (natural) Legal Ethical Political (governments - federal, state and local) Social (culture, language and beliefs) Technological Global (international)

I have added (to the textbook environmental factors) the items in blue, which make the list of environmental factors a little more complete. These factors will be discussed in greater detail in later chapters to this course. The firm does NOT have control of the factors and forces that exist outside the firm. And, these outside factors and forces seem to be always changing. Therefore, the firm must be aware of these uncontrollable factors and forces and design its business

strategies and public affairs activities to meet the challenges brought about by these ever-changing outside factors and forces. Yes, the firm can try and influence factors and forces that exist outside the firm. This can be done through such actions as lobbying lawmakers and educating the public. These actions will be discussed later in the course. MANAGING THE EXTERNAL ENVIRONMENT Part of managing the external environment is to understand where the external environment fits with the Strategic Planning Process. To begin the thought process, effective managers develop a plan. The term Strategy usually is reserved for long-term plans of at least 1 year but could be 2, 5, 10 or more years in the future. The term Tactics usually applies to plans that are short-term, 1 year or less. Below is a typical outline of the Strategic Business Process. This outline shows how the company mission and goals coupled with an analysis of the external and internal environment lead to developing strategies that build on strengths and opportunities and minimize threats and weaknesses. Note that in the ultimate strategic plan, the successful organization exploits its strengths and opportunities and changes its threats into opportunities and its weaknesses into strengths. Obviously this is not easy to do in a competitive world. 1. Business goals, objectives and mission 2. Situation analysis

a) Factors external to the firm

i) Environmental factors such as economic, geophysical, legal, political, social, and technological ii) Industry analysis – competitors, suppliers and distributors iii) Customer and market analysis – both business customers and ultimate consumers plus demographic trends

b) Factors internal to the firm i) Company situation – resources, skills, competitive advantages, capital investment, and financial position ii) SWOT analysis – strengths, weaknesses, opportunities and threats

3. Strategic alternative formulation 4. Strategic business program

a) Specific goals and objectives of the plan

b) Financial plan c) Operations plan d) Marketing plan e) Personnel plan f) Organizational plan

5. Strategic plan financial projections, implementation and control Strategy is a carefully developed plan created by the firm to meet its business goals and objectives. This plan is usually long-term in nature and, if pursued, is costly to reverse. Competitive companies develop strategic plans regularly (annually, bi-annually, etc.). The purpose of these plans is to determine how the firm will meet its goals and objectives over the next several years. Firms should consider all the relevant environmental factors before making any strategic decisions. It is possible for some environmental factors to be favorable to the firm’s situation and, at the same time, some to be unfavorable. The firm needs to weigh all the pros and cons before determining its best alternatives. Environmental factors that are of particular importance or have a major influence on a company are called driving forces. Typically, there are three to five environmental factors that greatly impact the company’s strategic plans. In the case of Merck and Pfizer, factors such as new medical research (technology), consumers importing drugs from Canada (global), and the Food & Drug Administration (FDA) procedures for drug testing (political – government) have a profound influence on the strategy of both companies. Similarly, in the case of Volkswagen, factors such as laws about pollution (legal), technology availability to by-pass emissions tests, consumers outside of Germany buying Volkswagen cars (global), and regulatory organizations (political – government) had an influence on the strategy of the company. COMPANY IMAGE The overall image of a company can help or hinder the firm’s public affairs management. Part of a company’s strategy to influence the external environment should be to develop a favorable corporate image. Corporate image is the overall perceptions that stakeholders have about the company. In all probability, a company has an image whether the company has had a hand in developing that image or not. The actions a company takes are bound to create an image in stakeholders’ minds about the organization. Since companies most likely want a favorable image among its stakeholders, managing the perceived company image of its stakeholders is a very good idea. Poor management can change a company’s image. Certainly, the Volkswagen scandal, the Tylenol recalls, and the many recalls Toyota faced over the

past five years have changed some minds about the quality of products created and sold by these companies. Copyright © 2017 by Linda A. Hayes, Ph.D. All rights reserved. Portions of these notes are based on ‘Business and Society: Stakeholders, Ethics, Public Policy,’ Lawrence and Weber, 15th, McGraw-Hill, New York: 2017.