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Way out of the Maggi like entanglements: Holistic Risk Management!

Jun 14, 2015

The Maggi saga goes on and one does not know how far and wide could it be. Brand gurus and PR experts are at large prescribing what ought to have been done and what has so far not been done. My intent is not to just dole insurance solutions but take a holistic risk management perspective where brand and risk converge. Here is a wakeup call. All this while it was the errors and omissions of the IT enabled services catering to the off-shored or outsourced needs of overseas entities that were expected to be the only ones vulnerable, then came in the pharmaceuticals and more recently the auto component manufacturers. Off-shored FMCG brands, particularly the ones high on market share, tend to overlook the risks Emerging Markets pose howsoever successful a brand may seem in the present. Lost in their hubris? Are there lessons to be learnt from other segments? Let’s also not forget risks encountered by the Indian companies with multinational aspirations.

Risk transfer

Since the intent is not to dismiss insurance, I will touch upon this. It is a key component in the risk management value chain and the best known form of risk transfer. Unfortunately, we here are still obsessed with the asset class of coverages. Companies do not die due to the damage to its brick and mortar. They can however perish if there are law suits, consumer and reputational onslaughts. Some of you may remember Enron which even dragged its auditor along.

The early symptoms may include: Class action, Satyam Computers’ Indian retail share-holders could not but Maggi’s manufacturer is a sitting duck, now that the Companies Act 2013 has blessed it. There is already a call from the highest quarters suggesting action from consumers on these lines. This makes its Indian board susceptible.  Dipping stock price here may trigger suits against its directors and officers. The reputational issues in this market may have a drag effect on its globally traded stocks. A good D&O cover is also necessary for attracting and retaining quality independent directors.

While it is one thing to have a Product Liability cover in place with a product recall extension, most clients have no recall protocol. Just having a cover in place may not be good enough. Likewise, if you employ external technicians and professionals, they ought to have their respective Professional Indemnity insurance in place. So would be the case if you were to outsource manufacturing partially or fully to external parties. Buying any of these covers is a complex informed process. The customer must be upfront in disclosing all desired information. Do not be tempted by cheap pricing. Most of these covers are long-tail and call for underwriting expertise not abundantly available. The claims may present themselves several years later. Thus make sure your insurer has the expertise, balance sheet and longevity. Seek professional advice from specialist brokers.

Cultural diversity and uniqueness

Many multinationals have global risk management programmes but not all markets can be treated in the same breath. Each market will have its share of ups and downs which would neither be linear nor predictable. Disney’s success in Japan did not guarantee the same fate in France. The Euro Disney case, on the other hand, points to a situation whereby a business venture in which financial risk had been thoroughly assessed and controlled was seriously undermined by a failure to manage risks associated with national culture. It had previously taken the American theme park practice and successfully transplanted it to Japan where there appears to have been fewer, if any, problems than those that arose in France. It only goes on to show that even in a highly risk-conscious organisation, the strategic risk management framework in use did not cater for “soft” risks such as national culture, thereby endangering the brand.

Anticipating increases in global energy demands, Unocal started operations in Myanmar in 1992. The consortium of investors included the French oil company TOTAL and Burmese and Thai investors. The project consisted of a pipeline to transport natural gas from the offshore Yadana gas field into Myanmar and Thailand. Human rights and environmental groups were successful in mustering opposition to the company’s role in the country. This eventually led to sanctions imposed by Clinton Administration on new investments by US companies in Myanmar. The ‘Burma’ pipeline case illustrates the cost of ignoring ethics and supports the assertion that although ethical behavior for the firm can turn out to be costly, the risk of ignoring ethics may be costlier still. Pulling out of the whole deal in the end with attendant costs and loss of reputation was probably costlier. There seems to have been little awareness or identification of the risk impact of the company doing business with the regime.

According to an HBR report, successful European companies share one critical characteristic in addition to their reliance on alternative media: senior managers drive the brand building. They actively make brand building part of their strategic plans and, as a result, integrate their alternative approaches to brand building into their overall concept of the brand. In contrast, many US companies delegate the development of brand strategy to someone who lacks the clout and incentives to think strategically. Or they pass the task to an advertising agency. That creates a distance between senior managers and their key asset, the brand – the driver of future growth opportunities. That distance, it is believed, can make the coordination of communication efforts difficult, resulting in confusion for customers, loss of synergy and performance that falls short of potential. An interesting allusion could be the level at which the risk-management function in an organisation reports into. The higher it is, greater the commitment and the safer the organization. Did Nestle India miss out somewhere, could be a subject matter of another discussion?

In conclusion: But what is the big deal about risk management in brands and brand management of risks? In a complex world of insurance – other than deductibles, excess, cover limits, exclusions, et al – newer forms of catastrophe and interruptions keep rearing their heads. Increasingly, insurance covers less and less of more and more. Moreover, in a globalizing world, it is not the physical side of the risk, but the brand essence that is most vulnerable. A well-managed brand, with embedded risk management, can outlive any physical calamity and go well beyond known barriers of indemnity. A lesson Indian multinationals may wish to overlook only at their own peril.

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