P3 Public Relations

In Recall, a Role Model Stumbles
By NATASHA SINGER
Published: January 17, 2010

The Harvard Business School teaches future executives the gold standard in brand crisis management. The model dictates that a company should communicate clearly with the public about a crisis, cooperate with government officials, swiftly begin its own investigation of a problem and, if necessary, quickly institute a product recall.

Certain lots of products that included Motrin, Rolaids, St. Joseph Aspirin and Tylenol were recalled on Friday by McNeil.

The template is based on Johnson & Johnson’s conduct in 1982, when several people died after taking tainted Tylenol pills. The company’s reaction to the crisis is widely regarded as exemplary.

But last week, Johnson & Johnson appeared to abandon its own template, stunning a few business school professors. Its conduct also drew harsh criticism from federal officials.

On Friday, McNeil Consumer Healthcare, a division of Johnson & Johnson, announced the recall of several hundred batches of popular over-the-counter medicines, including Benadryl, Motrin, Rolaids, Simply Sleep, St. Joseph Aspirin and Tylenol.

According to a federal inspection report, the response was anything but swift. The recall came 20 months after McNeil first began receiving consumer complaints about moldy-smelling bottles of Tylenol Arthritis Relief caplets, according to a warning letter sent by the Food and Drug Administration to the company on Friday. Since then, a few people have also reported temporary digestive problems like nausea, vomiting and stomach pain, the agency said.

The McNeil unit of Johnson & Johnson had recalled some batches of the arthritis drug at the end of 2009. But the company did not conduct a timely, comprehensive investigation, did not quickly identify the source of the problem, and did not notify authorities in a timely fashion, prolonging consumer exposure to the products, the warning letter said.

Analysts said the company’s seemingly slow response appeared out of character for one of the most trusted corporate brands in America, the maker of beloved household products like Johnson’s Baby Shampoo and Band-Aids.

And the recall, they said, had the potential to encourage consumers, who may have perceived name-brand medicines as being a higher quality worth their premium prices, to switch to less expensive drugstore brands.

“The F.D.A. comments on Friday were devastating because they make the company seem to be complacent and sloppy,” said Timothy Calkins, a clinical professor of marketing at the Kellogg School of Management at Northwestern University in Evanston, Ill.

Deborah M. Autor, the director of the Office of Compliance at the F.D.A.’s Center for Drug Evaluation and Research, said on a conference call with journalists on Friday that the company should have acted faster.

“When something smells bad literally or figuratively,” Ms. Autor said, “companies must aggressively investigate and take all necessary actions to solve the problem.”

In response to a query from a reporter on Sunday, a spokeswoman for McNeil said that the company was working with the F.D.A. to resolve the agency’s concerns.

“We’re conscious of the fact that people expect more of us,” the spokeswoman, Bonnie Jacobs, wrote in an e-mail message. “McNeil Consumer Healthcare has applied broad criteria to identify and remove all product lots that it believes may have the potential to be affected, even if they have not been the subject of consumer complaints.”

In a statement on Friday, McNeil said the breakdown of a chemical used to treat wood pallets that transport and store product packaging was the source of the moldy smell in some products.

The company has set up a Web site, McNeilProductRecall.com, which provides the list of recalled batches, also known as lots. Consumers can also call 888-222-6036 to ask about a refund or replacement of recalled products.

Separately on Friday, the Justice Department also filed charges against Johnson & Johnson in federal court in Massachusetts, accusing the company of paying kickbacks to a nursing home pharmacy to promote several of its prescription drugs, including the antipsychotic drug Risperdal, to elderly patients. The company said on Friday that its conduct had been legal and appropriate. The company was reviewing the government’s complaint and intends to respond in court, a spokeswoman said.

Mr. Calkins said the company faces even more public scrutiny with both problems coming out on the same day.

“Now you have two stories that people are connecting,” Mr. Calkins said. “It is a bit of a compound fracture.”

He and other analysts speculated that company managers might have underestimated the extent of the chemical contamination problem or might have underestimated the public relations issue that could ensue.

This is not the first time a multinational corporation appears to have underreacted to a limited product problem that turned into a big public relations headache, said Stephen A. Greyser, a professor emeritus of marketing at the Harvard Business School. Coca-Cola, he said, was slow to respond to reports in 1999 that several hundred people in Western Europe had become sick after drinking Coke.

Mr. Greyser said he was puzzled by Johnson & Johnson’s corporate conduct in this instance.

The F.D.A.’s charges of bad behavior have not yet been proved, he said, but they were serious enough that the company should be more forthright about what its own investigations showed.

“This is an instance where behavior is more important than communications,” said Mr. Greyser, who wrote Harvard’s original case study on Tylenol in 1982. “Communications and good public relations can be very helpful, but it can’t overcome bad behavior.”

In a climate in which Americans have come to expect perfection in consumer goods, companies are better off overreacting than underreacting when product problems arise, said Michael Braun, an assistant professor of marketing at the M.I.T. Sloan School of Management.

Such an extreme measure as Johnson & Johnson’s nationwide recall of Tylenol in 1982 may not have been warranted for safety reasons, he said, but it reflected well on the company.

“These kinds of actions have tremendous public relations value and that can protect a brand because it engenders trust,” he said. “They probably haven’t done that in this case.”

Johnson & Johnson’s conduct is all the more out of step, analysts said, because the drug maker had been one of the first in the pharmaceutical industry to set up its own blog, jnjbtw.com.

In 2008, for example, in an act of transparent crisis management, the blog apologized to readers for a Motrin ad that had insulted some mothers and explained that the company had pulled the ad campaign in response.

But, as of Sunday at 6 p.m., on the issue of the current recall, the blog so far has had no comment from the company. (On Monday, the Johnson & Johnson blog added a posting on the recall, referring readers to the McNeil Web site and the statement that McNeil had released.)

THE past year or two has tested the idea that all publicity is good publicity, at least when it comes to business. Undeserved bonuses, plunging share prices and government bail-outs, among other ills, have elicited the ire of the media and public—and created a bonanza for public-relations firms. The recession has increased corporate demand for PR, analysts say, and enhanced the industry’s status. “We used to be the tail on the dog,” says Richard Edelman, the boss of Edelman, the world’s biggest independent PR firm. But now, he continues, PR is “the organising principle” behind many business decisions.

According to data from Veronis Suhler Stevenson (VSS), a private-equity firm, spending on public relations in America grew by more than 4% in 2008 and nearly 3% in 2009 to $3.7 billion. That is remarkable when compared with other forms of marketing. Spending on advertising contracted by nearly 3% in 2008 and by 8% in the past year. PR’s position looks even rosier when word-of-mouth marketing, which includes services that PR firms often manage, such as outreach to bloggers, is included. Spending on such things increased by more than 10% in 2009.

Not all PR firms did as well as IPREX, a global consortium whose revenues increased by 14% last year. Many had to shed jobs, and some estimates show the industry’s overall revenues declining, although not nearly as sharply as those of most of the businesses it serves. According to a survey by StevensGouldPincus, a consulting firm for the communications industry, nearly 64% of participating firms saw revenues slide in 2009 and only 23% saw revenues increase, perhaps because businesses put their faith only in the biggest and most established firms.

PR has done well in part because it is often cheaper than mass advertising campaigns. Its impact, in the form of favourable coverage in the media or online, can also be more easily measured. Moreover, PR firms are beginning to encroach on territory that used to be the domain of advertising firms, a sign of their increasing clout. They used chiefly to pitch story ideas to media outlets and try to get their clients mentioned in newspapers. Now they also dream up and orchestrate live events, web launches and the like. “When you look at advertising versus public relations, it’s not going to be those clearly defined silos,” says Christopher Graves, the boss of Ogilvy Public Relations Worldwide. “It may be indistinguishable at some point where one ends and the other begins.”

PR has also benefited from the changing media landscape. The withering of many traditional media outlets has left fewer journalists from fewer firms covering business. That makes PR doubly important, both for attracting journalists’ attention, and for helping firms bypass old routes altogether and disseminate news by posting press releases on their websites, for example.

The rise of the internet and social media has given PR a big boost. Many big firms have a presence on social-networking sites, such as Facebook and Twitter, overseen by PR staff. PR firms are increasingly called on to track what consumers are saying about their clients online and to respond directly to any negative commentary. When two employees of Domino’s, a pizza chain, uploaded a video of themselves apparently sticking ingredients for dishes they were preparing up their noses, the firm responded by posting a video of its own online, of a senior executive apologising for the incident.

That sort of content is proliferating. A PR firm called Ketchum helped IBM start a blog about sustainability, complete with posts written by the technology firm’s executives. It also created cartoons on the subject that it uploaded to YouTube. Edelman recently worked with eBay on the launch of a web-only magazine, “The Inside Source”, which provides articles on shopping and tells readers what is selling well on the online retail giant’s website.

VSS forecasts that spending on PR in America will surpass $8 billion by 2013, with much of the growth coming from online projects such as these. According to Miles Nadal, chief executive of MDC Partners, a media holding company, investment in digital PR accelerated during the recession “and will go forward in perpetuity” because clients became more focused on measuring the impact of their efforts. The internet offers various yardsticks, from traffic to cheerleading websites to numbers of Facebook fans, whereas the number of people who see a conventional advertisement is much harder to gauge.

Perhaps the best indication of PR’s growing importance is the attention it is attracting from regulators. They are worried that PR firms do not make it clear enough that they are behind much seemingly independent commentary on blogs and social networks. In October America’s Federal Trade Commission published new guidelines for bloggers, requiring them to disclose whether they had been paid by companies or received free merchandise. Further regulation is likely. But that will not hamper PR’s growth, says Jim Rutherfurd of VSS. After all, companies that fall foul of the rules will need the help of a PR firm.

After meeting with a number of clients of the past month and discussing goals and strategies for 2010—I began organizing my thoughts into a list of what I think we can expect to see from marketing, PR, social media, and technology in 2010:

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