Case Study Competition inCorporate Communications2005

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Coca Cola India

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Euornext N.V.: The Fight for LIFFE

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Starbucks Corporation: Can Customers Breastfeed in a Coffee Shop?

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United States Postal Service: Lessons in Crisis Communication

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Managing the Tide, Marketing to Controversial Demographics

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Boeing Co.: Government Contracts and Conflicts of Interest

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How Dumplings Became Garbage? The Korea Food and Drug Administration’s Handling of a Food Scare

To view the case study submissions,teaching notes and slides, go to

www.awpagesociety.com

(Case studies can be found under Resources)

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Four years ago, the Arthur W. Page Society issued its first callfor original case studies written by business school studentsthat focus on corporate communications and the practice ofpublic relations. Last year the call for entries was expanded toinclude students and faculty at communications andjournalism schools.

The objectives for the competition remain the same.They are to:

• Introduce the practical applications of the core principlesthat define public relations as a critical function ofmanagement to scholars, teachers and students.

• Encourage research that contributes to the profession’sbody of knowledge and provide practical suggestions onhow to improve the corporate public relations function.

As part of the objective to increase awareness among futurebusiness leaders about the value of public relations, the PageSociety, in alliance with the Institute for Public Relations,invited the students and faculty at more than 1,000 accreditedschools of business, communications and journalism toparticipate in the 2005 case writing competition. Each year,the competition has attracted increasing numbers of entriesfrom students representing a broad spectrum of universities.This year’s winners were selected from among 42 entries,nearly evenly divided between business schools (22 entries)and communications/journalism schools (20 entries). Thetotal submissions represent a 13 percent increase over lastyear’s competition and included entries from Australia,Canada, Singapore and Turkey, as well as from schoolsthroughout the United States.

The student authors and their faculty advisers are awardedcash prizes and their prize-winning entries are published in aPage Society Journal and also can be found on the Society’sWeb site, www.awpagesociety.com. The Grand Prize winnersare recognized at a dinner that is part of the Society’s annualSpring Seminar. This year, the dinner is scheduled for April 7at the St. Regis Hotel in New York City.

About the Sponsors

The Arthur W. Page Society is a select membershiporganization for senior public relations and corporatecommunications executives who seek to strengthen themanagement policy role of the corporate public relations

officer. It is committed to the belief that public relations is afunction of executive management and is central to thesuccess of the corporation.

The Institute for Public Relations is the only independentfoundation in the field of public relations dedicated toresearch and education. Through publications, lectures,awards, symposia, professional development forums andother programs, IPR has been at the leading edge of efforts topromote academic and professional excellence and to buildthe professional body of knowledge.

About Arthur W. Page

Considered the father of corporate public relations, ArthurW. Page (1883-1960) was the first person in a public relationsposition to serve as an officer and member of the Board ofDirectors of a major corporation. He viewed public relationsas the art of developing, understanding and communicatingcharacte – both corporate and individual. Page believed thesuccessful corporation must operate in the public interest,manage for the long run and make customer satisfaction itsprimary goal.

The principles of business conduct for which he becameknown have influenced thousands of thought leaders andhave earned the support and respect of chief executiveofficers throughout the country. The Society bearing hisname is built upon a foundation of management conceptsthat have been tested for more than half a century. Pagepracticed these principles of public relations management asa means of implementing his philosophy (shown on page 68).

Examples of the effective use of the Page Principles is one ofthe criteria by which the case writing entries are judged.

Guidelines and Judging for the Competition

A panel of prestigious judges representing the corporate,agency and academic sectors of public relations reviewed allcase studies that were entered in this year’s competition,which began with a nationwide call in August, 2004. Thejudging was completed in February, 2005. In all instances, thejudges are acknowledged experts in the field with no specificassociation to either the case writers or the universities theyattend, nor to the companies or organizations that may be thesubjects of the cases they review.

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This year’s judges were: Catherine V. Babington, vicepresident-investor relations and public affairs, AbbottLaboratories; Patty Blackburn, senior vice president-corporate communications, Bank of America; ElizabethBrooks, vice president-corporate communications, Nextel; R.Jeep Bryant, managing director-global head ofcommunications, The Bank of New York; Barbara S.Carmichael, The Brunswick Group; Debra Sanchez Fair;James Farmer, vice president-merchandising, advertising andcommunications, GMAC; Michael Goodman, Ph.D.,director-Corporate Communication Institute, FairleighDickinson University; Steven Hoechster, senior vicepresident, Euro RSG Magnet; Richard S. Kline, regionalpresident and senior partner, Fleishman-Hillard, Inc.; AlanKelly, chief executive officer, Applied CommunicationsGroup; Frank Ovaitt, president, Institute for Public Relations;Douglas G. Pinkham, president, Public Affairs Council; EllenRobinson, executive vice president-communications andgovernment relations, Tennessee Valley Authority; Richard J.White, vice president-corporate communications, WisconsinEnergy Corporation; and W. Ward White, former vicepresident-corporate relations, Northwestern Mutual.

The judges had the authority to make a final determinationregarding any or all of the posted prizes and also theauthority to make no awards if none seemed appropriate.

Criteria used to judge all entries included the following:

• The purpose of the case study, its relevance and timeliness.

• The significance of the business problem (not thecommunications problem) and the critical issuesidentified and explored.

• How the effective use of the Page Principles generatedconstructive action and support from affectedconstituencies or, conversely, the outcomes generated fromthe ineffective use or non-use of the Page Principles.

• How well the problem addresses a substantive challengeand its importance to the organization.

• How the interests of the organization and its constituentswere served.

• How the impact of the communication is measured.

The judges were also asked to weigh a submission’s usefulnessand general value to the profession as well as its educationalvalue.

Awards and Prizes

Cases submitted for this competition may address anycategory or specialty within the field of corporatecommunications or public relations. At the discretion of thejudges, 1st, 2nd and 3rd prizes may be presented. The GrandPrize is awarded to the best overall entry. The posted prizesfor the 2005 competition were:

Prize Student(s) Faculty Adviser(s)

Grand $5,000 $1,500

1st $2,500 $650

2nd $1,500 $350

3rd $800 $200

Eligibility Requirements

Any student, graduate or undergraduate, who is enrolled inan accredited school of business, communications orjournalism and is pursuing a degree (full or part time), iseligible to participate in this competition. Students mayparticipate as sole authors or as members of a case studyteam, not to exceed four people. In order to participate, eachstudent author or case study team must have sponsorship of afaculty member who is expected to advise and guide the casestudy’s development.

Recent graduates who have received business degrees duringthe past two years are eligible to submit case entries that werewritten while they were enrolled as students. Facultysponsors may be full-time or part-time, regular or adjunct,tenured or non-tenured.

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Jennifer KayeFaculty Adviser: Paul A. Argenti

Tuck School of BusinessDartmouth College

Coca-Cola India

On August 20, 2003 Sanjiv Gupta, president and CEO ofCoca-Cola India, sat in his office contemplating the events ofthe last two weeks and debating his next move. Sales haddropped by 30-40 percent1 in only two weeks on the heels ofa 75 percent five-year growth trajectory and 25-30 percent2

year-to-date growth. Many leading clubs, retailers,restaurants, and college campuses across the country hadstopped selling Coca-Cola3 and only six weeks into his newrole as CEO, Gupta was embroiled in a crisis that threatenedthe momentum gained from a highly successful two-yearmarketing campaign that had given Coca-Cola marketleadership over Pepsi.

On August 5, The Center for Science and Environment(CSE), an activist group in India focused on environmentalsustainability issues (specifically the effects ofindustrialization and economic growth) issued a press releasestating: “Twelve major cold drink brands sold in and aroundDelhi contain a deadly cocktail of pesticide residues”(SeeExhibit 1). According to tests conducted by the PollutionMonitoring Laboratory (PML) of the CSE from April toAugust, three samples of 12 PepsiCo and Coca-Cola brandsfrom across the city were found to contain pesticide residuessurpassing global standards by 30-36 times including lindane,DDT, malathion and chlorpyrifos (See Exhibit 2). These fourpesticides were known to cause cancer, damage to thenervous and reproductive systems, birth defects, and severedisruption of the immune system.4

In reaction to this report, the Indian government bannedCoke and Pepsi products in Parliament, and stategovernments launched independent investigations, sendingsoft drink samples to labs for testing. The Coca-Cola BottlingCompany (Coke) stock dipped by $5 on the New York StockExchange from $55 to $50 in the six sessions following theAugust 5 disclosure, as did shares of Coca-Cola Enterprises(CCA).5

Pepsi and Coca-Cola called the CSE allegations “baseless” andquestioned the method of testing but the CSE claimed it hadfollowed standard procedures documented by the U.S.Environmental Protection Agency including GasChromatography and Mass Spectrometry. Pepsi’s own testsconducted at an independent laboratory showed nodetectable pesticides and led Pepsi to file a petition with thehigh court questioning the credibility of the CSE’s claims6

while Coke’s Gupta commented: “The allegation is serious andit has the potential to tarnish the image of our brands in thecountry. If this continues, we will consider legal recourse.”7

Despite Coke and Pepsi’s early responses denying the validityof the CSE’s claims and threatening legal action, a surveyconducted in Delhi a few days after the CSE announcementfound that a majority of consumers believed the findingswere correct and agreed with Parliament’s move to ban thesale of soft drinks.8 It was clear that the $1 billion Indian softdrink market9 was at stake and Gupta had to act.

History of Coke

The Early Days

Coca-Cola was created in 1886 by John Pemberton, apharmacist in Atlanta, GA, who sold the syrup mixed withfountain water as a potion for mental and physical disorders.The formula changed hands three more times before Asa D.Candler added carbonation and by 2003, Coca-Cola was theworld’s largest manufacturer, marketer, and distributor ofnonalcoholic beverage concentrates and syrups, with morethan 400 widely recognized beverage brands in its portfolio.

With the bubbles making the difference, Coca-Cola wasregistered as a trademark in 1887 and by 1895, was being soldin every state and territory in the United States. In 1899, itfranchised its bottling operations in the U.S., growing quickly

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to reach 370 franchisees by 1910.10 Headquartered in Atlantawith divisions and local operations in over 200 countriesworldwide, Coca-Cola generated more than 70 percent of itsincome outside the United States by 2003 (See Exhibit 3).

International Expansion

Coke’s first international bottling plants opened in 1906 inCanada, Cuba, and Panama.11 By the end of the 1920s, Coca-Cola was bottled in 27 countries throughout the world andavailable in 51 more. In spite of this reach, volume was low,quality inconsistent, and effective advertising a challenge withlanguage, culture, and government regulation all serving asbarriers. Former CEO Robert Woodruff ’s insistence thatCoca-Cola wouldn’t “suffer the stigma of being an intrusiveAmerican product,” and instead would use local bottles, caps,machinery, trucks, and personnel contributed to Coke’schallenges as well with a lack of standard processes andtraining degrading quality.12

Coca-Cola continued working for over 80 years onWoodruff ’s goal: to make Coke available wherever andwhenever consumers wanted it, “in arm’s reach of desire.”13

The Second World War proved to be the stimulus Coca-Colaneeded to build effective capabilities around the world andachieve dominant global market share. Woodruff ’s patrioticcommitment “that every man in uniform gets a bottle ofCoca-Cola for five cents, wherever he is and at whatever costto our company”14 was more than just great public relations.As a result of Coke’s status as a military supplier, Coca-Colawas exempt from sugar rationing and also receivedgovernment subsidies to build bottling plants around theworld to serve WWII troops.15

Turn of the Century Growth Imperative

The 1990s brought a slowdown in sales growth for theCarbonated Soft Drink (CSD) industry in the United States,achieving only 0.2 percent growth by 2000 (just under 10billion cases) in contrast to the 5-7 percent annual growthexperienced during the 1980s. While per capita consumptionthroughout the world was a fraction of the United States,’major beverage companies clearly had to look elsewhere forthe growth their shareholders demanded. The loomingopportunity for the 21st century was in the world’sdeveloping markets with their rapidly growing middle classpopulations.

The World’s Most Powerful Brand

Interbrand’s Global Brand Scorecard for 2003 ranked Coca-Cola the #1 Brand in the World and estimated its brand valueat $70.45 billion (See Exhibit 4).16 The ranking’smethodology determined a brand’s valuation on the basis ofhow much it was likely to earn in the future, distilling thepercentage of revenues that could be credited to the brand,and assessing the brand’s strength to determine the risk offuture earnings forecasts. Considerations included marketleadership, stability, and global reach, incorporating its abilityto cross both geographical and cultural borders.17

From the beginning, Coke understood the importance ofbranding and the creation of a distinct personality.18 Itscatchy, well-liked slogans19 (“It’s the real thing” (1942, 1969),“Things go better with Coke” (1963), “Coke is it” (1982),“Can’t beat the feeling” (1987), and a 1992 return to “Can’tbeat the real thing”)20 linked that personality to the corevalues of each generation and established Coke as theauthentic, relevant, and trusted refreshment of choice acrossthe decades and around the globe.

Indian History

India is home to one of the most ancient cultures in theworld dating back over 5,000 years. At the beginning of the21st century, 26 different languages were spoken across India,30 percent of the population knew English, and greater than40 percent were illiterate. At this time, the nation was in themidst of great transition and the dichotomy between the oldIndia and the new was stark. Remnants of the caste systemexisted alongside the world’s top engineering schools andgrowing metropolises as the historically agricultural economyshifted into the services sector. In the process, India hadcreated the world’s largest middle class, second only to China.

A British colony since 1769 when the East India Companygained control of all European trade in the nation, Indiagained its independence in 1947 under Mahatma Ghandi andhis principles of non-violence and self-reliance. In thedecades that followed, self-reliance was taken to the extremeas many Indians believed that economic independence wasnecessary to be truly independent. As a result, the economywas increasingly regulated and many sectors were restrictedto the public sector. This movement reached its peak in 1977when the Janta party government came to power and Coca-Cola was thrown out of the country. In 1991, the firstgeneration of economic reforms was introduced andliberalization began.

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Coke in India

Coca-Cola was the leading soft drink brand in India until1977 when it left rather than reveal its formula to thegovernment and reduce its equity stake as required under theForeign Exchange Regulation Act (FERA) which governed theoperations of foreign companies in India. After a 16-yearabsence, Coca-Cola returned to India in 1993, cementing itspresence with a deal that gave Coca-Cola ownership of thenation’s top soft-drink brands and bottling network. Coke’sacquisition of local popular Indian brands including ThumsUp (the most trusted brand in India),21 Limca, Maaza, Citraand Gold Spot provided not only physical manufacturing,bottling, and distribution assets but also strong consumerpreference. This combination of local and global brandsenabled Coca-Cola to exploit the benefits of global brandingand global trends in tastes while also tapping into traditionaldomestic markets. Leading Indian brands joined thecompany’s international family of brands, including Coca-Cola, Diet Coke, Sprite and Fanta, plus the Schweppesproduct range. In 2000, the company launched the Kinleywater brand and in 2001, Shock energy drink and thepowdered concentrate Sunfill hit the market.

From 1993 to 2003, Coca-Cola invested more than US$1billion in India, making it one of the country’s topinternational investors.22 By 2003, Coca-Cola India had wonthe prestigious Woodruff Cup from among 22 divisions ofthe Company based on three broad parameters of volume,profitability, and quality. Coca-Cola India achieved 39percent volume growth in 2002 while the industry grew 23percent nationally and the company reached break-evenprofitability in the region for the first time.23 Encouraged byits 2002 performance, Coca-Cola India announced plans todouble its capacity at an investment of $125 million (Rs. 750crore) between September 2002 and March 2003.24

Coca-Cola India produced its beverages with 7,000 localemployees at its 27 wholly-owned bottling operations,supplemented by 17 franchisee-owned bottling operationsand a network of 29 contract-packers to manufacture a rangeof products for the company. The complete manufacturingprocess had a documented quality control and assuranceprogram including over 400 tests performed throughout theprocess (See Exhibit 5).

The complexity of the consumer soft drink market demandeda distribution process to support 700,000 retail outletsserviced by a fleet that includes 10-ton trucks, open-bay

three-wheelers, and trademarked tricycles and pushcarts thatwere used to navigate the narrow alleyways of the cities.25 Inaddition to its own employees, Coke indirectly createdemployment for another 125,000 Indians through itsprocurement, supply, and distribution networks.

Sanjiv Gupta, president and CEO of Coca-Cola India, joinedCoke in 1997 as vice president - marketing and wasinstrumental to the company’s success in developing a brandrelevant to the Indian consumer and in tapping India’s vastrural market potential. Following his marketingresponsibilities, Gupta served as head of operations forcompany-owned bottling operations and then as deputypresident. Seen as the driving force behind recent successfulforays into packaged drinking water, powdered drinks, andready-to-serve tea and coffee, Gupta and his marketingprowess were critical to the continued growth of thecompany.26

The Indian Beverage Market27

India’s one billion people, growing middle class, and low percapita consumption of soft drinks made it a highly contestedprize in the global CSD market in the early 21st century. Tenpercent of the country’s population lived in urban areas orlarge cities and drank 10 bottles of soda per year while thevast remainder lived in rural areas, villages, and small townswhere annual per capita consumption was less than fourbottles. Coke and Pepsi dominated the market and togetherhad a consolidated market share above 95 percent. While softdrinks were once considered products only for the affluent,by 2003 91 percent of sales were made to the lower, middleand upper middle classes. Soft drink sales in India grew 76percent between 1998 and 2002, from 5,670 million bottles toover 10,000 million (See Exhibit 6) and were expected togrow at least 10 percent per year through 2012.28 In spite ofthis growth, annual per capita consumption was only sixbottles versus 17 in Pakistan, 73 in Thailand, 173 in thePhilippines and 800 in the United States.29

With its large population and low consumption, the ruralmarket represented a significant opportunity for penetrationand a critical battleground for market dominance. In 2001,Coca-Cola recognized that to compete with traditionalrefreshments including lemon water, green coconut water,fruit juices, tea, and lassi, competitive pricing was essential. Inresponse, Coke launched a smaller bottle priced at almost 50percent of the traditional package.

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Marketing Cola in India

The post-liberalization period in India saw the comeback ofcola but Pepsi had already beaten Coca-Cola to the punch,creatively entering the market in the 1980s in advance ofliberalization by way of a joint venture. As early as 1985, Pepsitried to gain entry into India and finally succeeded with thePepsi Foods Limited Project in 1988, as a JV of PepsiCo,Punjab government-owned Punjab Agro IndustrialCorporation (PAIC), and Voltas India Limited. Pepsi wasmarketed and sold as Lehar Pepsi until 1991 when the use offoreign brands was allowed under the new economic policyand Pepsi ultimately bought out its partners, becoming afully-owned subsidiary and ending the JV relationship in1994.30

While the joint venture was only marginally successful in itsown right, it allowed Pepsi to gain precious early experiencewith the Indian market and also served as an introduction ofthe Pepsi brand to the Indian consumer such that it was well-poised to reap the benefits when liberalization came. ThoughCoke benefited from Pepsi creating demand and developingthe market, Pepsi’s head start gave Coke a disadvantage in themind of the consumer. Pepsi’s appeal focused on youth andwhen Coke entered India in 1993 and approached the marketselling an American way of life, it failed to resonate asexpected.31

2001 Marketing Strategy

Coca-Cola CEO Douglas Daft set the direction for the nextgeneration of success for his global brand with a “Think local,act local” mantra. Recognizing that a single global strategy orsingle global campaign wouldn’t work, locally relevantexecutions became an increasingly important element ofsupporting Coke’s global brand strategy.

In 2001, after almost a decade of lagging rival Pepsi in theregion, Coke India re-examined its approach in an attempt togain leadership in the Indian market and capitalize onsignificant growth potential, particularly in rural markets.The foundation of the new strategy grounded brandpositioning and marketing communications in consumerinsights, acknowledging that urban versus rural India weretwo distinct markets on a variety of important dimensions.The soft drink category’s role in people’s lives, the degree ofdifferentiation between consumer segments and their reasonsfor entering the category, and the degree to which brands inthe category projected different perceptions to consumerswere among the many important differences between howurban and rural consumers approached the market forrefreshment.32

In rural markets, where both the soft drink category andindividual brands were undeveloped, the task was to broadenthe brand positioning while in urban markets, with highercategory and brand development, the task was to narrow thebrand positioning, focusing on differentiation throughoffering unique and compelling value. This lens, informed byconsumer insights, gave Coke direction on the tradeoffbetween focus and breadth a brand needed in a given marketand made clear that to succeed in either segment, uniquemarketing strategies were required in urban versus ruralIndia.

BRAND LOCALIZATION STRATEGY: THE TWO INDIAS

India A: “Life ho to aisi”

“India A,” the designation Coca-Cola gave to the marketsegment including metropolitan areas and large towns,represented four percent of the country’s population.33 Thissegment sought social bonding as a need and responded toaspirational messages, celebrating the benefits of theirincreasing social and economic freedoms. “Life ho to aisi,”(life as it should be) was the successful and relevant taglinefound in Coca-Cola’s advertising to this audience.

India B: “Thanda Matlab Coca-Cola”

Coca-Cola India believed that the first brand to offercommunication targeted to the smaller towns would own therural market and went after that objective with acomprehensive strategy. “India B” included small towns andrural areas, comprising the other 96 percent of the nation’spopulation. This segment’s primary need was out-of-homethirst-quenching and the soft drink category wasundifferentiated in the minds of rural consumers.Additionally, with an average Coke costing Rs. 10 and anaverage day’s wages around Rs. 100, Coke was perceived as aluxury that few could afford.34

In an effort to make the price point of Coke within reach ofthis high-potential market, Coca-Cola launched theAccessibility Campaign, introducing a new 200ml bottle,smaller than the traditional 300ml bottle found in urbanmarkets, and concurrently cutting the price in half, to Rs. 5.This pricing strategy closed the gap between Coke and basicrefreshments like lemonade and tea, making soft drinks trulyaccessible for the first time. At the same time, Coke investedin distribution infrastructure to effectively serve a disbursedpopulation and doubled the number of retail outlets in ruralareas from 80,000 in 2001 to 160,000 in 2003, increasingmarket penetration from 13 to 25 percent.35

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Coke’s advertising and promotion strategy pulled themarketing plan together using local language and idiomaticexpressions. “Thanda,” meaning cool/cold is also generic forcold beverages and gave “Thanda Matlab Coca-Cola”delicious multiple meanings. Literally translated to “Cokemeans refreshment,” the phrase directly addressed both theprimary need of this segment for cold refreshment while atthe same time positioning Coke as a “Thanda” or generic coldbeverage just like tea, lassi, or lemonade. As a result of theThanda campaign, Coca-Cola won Advertiser of the Year andCampaign of the Year in 2003 (See Exhibit 7).

Rural Success

Comprising 74 percent of the country’s population, 41percent of its middle class, and 58 percent of its disposableincome, the rural market was an attractive target and itdelivered results. Coke experienced 37 percent growth in 2003in this segment versus the 24 percent growth seen in urbanareas. Driven by the launch of the new Rs. 5 product, percapita consumption doubled between 2001-2003. Thismarket accounted for 80 percent of India’s new Cokedrinkers, 30 percent of 2002 volume, and was expected toaccount for 50 percent of the company’s sales in 2003.36

Corporate Social Responsibility

As one of the largest and most global companies in the world,Coca-Cola took seriously its ability and responsibility topositively affect the communities in which it operated. Thecompany’s mission statement, called the Coca-Cola Promise,stated: “The Coca-Cola Company exists to benefit and refresheveryone who is touched by our business.” The company hasmade efforts towards good citizenship in the areas ofcommunity, by improving the quality of life in thecommunities in which they operate, and the environment, byaddressing water, climate change and waste managementinitiatives. Their activities also included The Coca-ColaAfrica Foundation created to combat the spread ofHIV/AIDS through partnership with governments, UNAIDS,and other NGOs, and The Coca-Cola Foundation, focused onhigher education as a vehicle to build strong communitiesand enhance individual opportunity (See Exhibit 8).37

Coca-Cola’s footprint in India was significant as well. Thecompany employed 7,000 citizens and believed that for everydirect job, 30-40 more were created in the supply chain.38

Like its parent, Coke India’s Corporate Social Responsibility(CSR) initiatives were both community and environment-focused. Priorities included education, where primaryeducation projects had been set up to benefit children inslums and villages; water conservation, where the companysupported community-based rainwater harvesting projects to

restore water levels and promote conservation, education;and health, where Coke India partnered with NGOs andgovernments to provide medical access to poor peoplethrough regular health camps. In addition to outreach efforts,the company committed itself to environmentalresponsibility through its own business operations in Indiaincluding:39

Environmental due diligence before acquiring land orstarting projects

• Environmental impact assessment before commencingoperations

• Ground water and environmental surveys beforeselecting sites

• Compliance with all regulatory environmentalrequirements

• Ban on purchasing CFC-containing refrigerationequipment

• Waste water treatment facilities with trained personnel atall company-owned bottling operations

• Energy conservation programs

• 50 percent water savings in last seven years of operations

Previous Coke Crises

Despite Coke’s reputation as a socially responsible corporatecitizen, the company has faced its share of controversyworldwide surrounding both its products and its policies inthe years preceding the Indian pesticide crisis.

Ingram, et al. v. The Coca-Cola Company – 199940

In the spring of 1999, four current and former Coca-Colaemployees, led by Information Analyst Linda Ingram, filedbias charges against Coca-Cola in Atlanta Federal Court. Thelawsuit charged the company with racial discrimination andstated: “This discrimination represents a company-widepattern and practice, rather than a series of isolated incidents.Although Coca-Cola has carefully crafted African-Americanconsumers of its product by public announcements, strategicalliances and specific marketing strategies, it has failed toplace the same importance on its African-Americanemployees.”41

In the decades leading up to the suit, both internal andexternal warnings surrounding Coke’s diversity practices wereissued. In 1981, the Rev. Jesse Jackson, director of theRainbow/ PUSH coalition instigated a boycott against Coca-

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Cola challenging the company to significantly improve itsbusiness relationship with the African Americancommunity.42

The Ware report, written by Senior Vice President Carl Ware,an African-American executive at the company, cited a lack ofdiversity at the decision-making level, a basic lack ofworkplace diversity, a “ghettoization” among blacks whoworked for Cola-Cola, and an overt lack of respect forcultural differences as well as an implicit assumption thatAfrican-American employees lacked the intelligence to meetthe challenges of the highest executive levels.43

Cyrus Mehri, one of the most visible and successful plaintiffadvocates in the US, represented the group and was skilled atleveraging the power of the media, creating a true crisis forthe Coca-Cola Company and exerting tremendous pressurefor settlement. In 2000, the lawsuit was settled for $192.5million after the company had sent mixed messages anddamaging statements regarding the merit of the suit for overa year. Analysts identified the bias suit as a prime reason forthe $100 billion decrease in Coca-Cola’s stock price between1998-2000.44

Belgium 1999 45

On June 8, 1999, 33 Belgian school children became ill afterdrinking Coke bottled at a local facility in Antwerp. A fewdays later, more Belgians complained of similar symptomsafter drinking cans of Coke that had been bottled at a plant inDunkirk, France and 80 people in northern France wereallegedly stricken by intestinal problems and nausea, bringingthe total afflicted to over 250.

In the days following the first outbreak, 17 million cases ofCoke from five European countries were recalled anddestroyed. It was the largest product recall in Coke’s history,and Belgian and French authorities banned the sale of Coca-Cola products for 10 days. Germany placed a temporaryimport ban on Coca Cola produced in Belgium and theNetherlands, and Luxembourg banned all Coca Colaproducts. Health ministers in Italy, Spain, and Switzerlandwarned people about consuming Coke products.

Coca-Cola sources explained that the contamination was dueto defective carbon dioxide used at the Antwerp plant andthat a wood preservative used on shipping pallets hadcontaminated the outside of cans at the Dunkirk plant. TheEuropean Commission, however, believed production faultsand contaminated pipes were more likely to be the cause ofthe problem.

Though CEO Ivester was in Paris when the news broke, he flewhome to Atlanta and kept silent, waiting over a week to issuehis first public statement on the crisis, citing that “Coke woulddo whatever necessary to ensure the safety of its products.” ANetherlands-based toxicologist Coke had hired issued a reporton June 29 exempting the company from blame for the CO2impurity in Antwerp and the fungicide at Dunkirk. Thoughthe product ban was lifted, Coke had a tremendous amount ofwork to do to win back consumer confidence.

An aggressive PR campaign included vouchers and couponsfor free product delivered to each of Belgium’s 4.4 millionhomes, sponsored dances, beach parties, and summer fairs forteenagers, and significant television advertising reinforcing“Today, more than ever, we thank you for your loyalty.”

Kinley Bottled Water

On February 4, 2003 the Center for Science and Environment(CSE) in India released a report based on tests conducted bythe Pollution Monitoring Laboratory (PML) titled “PureWater or Pure Peril?” Analysis of 17 packaged drinking waterbrands sold across the country revealed evidence of pesticideresidues including lindane, DDT, malathion, and chlorpyrifos.The CSE used European norms for maximum permissiblelimits for pesticides in packaged water “because the standardsset for pesticide residues by the Bureau of Indian Standards(BIS) are vague and undefined.”46 Coca-Cola’s Kinley waterbrand had concentration levels 15 times higher thanstipulated limits, top-seller Biserli had 79 times and Aquaplustopped the list at 109 times.47 In the wake of this statement,Coca-Cola remained largely silent and the buzz went away.

Corporate Communications at Coca-Cola

Corporate Communications was a critical function at theCoca-Cola corporation given the number of constituenciesboth internal and external to the company. In addition, thecomplexity and global reach of the Company’s operationscould not be centrally managed and instead demanded amatrixed team organization.

The senior communications position at the company, seniorvice president - worldwide public affairs and communication,sat on the company’s executive committee and reported tothe chairman and CEO at the time of the crisis in India.Director-level corporate communication functions included:media relations, nutrition communications, financialcommunications, and marketing communications, but thegeographic diversity of the company’s businesses required

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regionally based communication leaders in addition to thecorporate resources in place. As a result, five regionalcommunications directors serviced North America, LatinAmerica, Asia, Europe, and Africa with their own teams ofcommunications professionals (See Exhibit 9).

NGO Activism48

NGOs (Non-Governmental Organizations) evolved toinfluence governments but by the early 21st century manyrealized that targeting corporations and key corporateconstituents such as investors and customers could be aneven more powerful way to effect change. Along with theirability to focus, gain attention, and act quickly was the highlevel of credibility NGOs had cultivated with manyconstituencies. This credibility stemmed in part from theiremotional, rather than fact-based, appeals and theimpassioned nature of their arguments.

The most common tactic of NGOs was to develop campaignsagainst business through which they garnered support fromconsumers and the media. These campaigns, such asGreenpeace’s attack on Shell Oil following the company’sdecision to dump the Brent Spar oil rig in the ocean in the1990s, typically focused on a single issue; targeted companieswith successful and well-known brands such as McDonald’sand Nike; and were augmented by market trends such as thehomogenization created by chains like Wal-Mart andStarbucks. NGOs realized that anti-corporate campaignscould be far more powerful than anti-governmentcampaigns. Global Exchange’s attack on Nike for sweatshoplabor conditions in the 1990s, for example, was one of themost highly publicized and also one of the most successfulanti-business campaigns in recent years.

Center for Science and Environment

The CSE, an NGO, was established in India in 1980 by agroup of engineers, scientists, journalists andenvironmentalists to “catalyze the growth of public awarenesson vital issues in science, technology, environment, anddevelopment.”49 Led by Sumita Narain, a former schoolmateof Coke India CEO Gupta, the CSE’s efforts includedcommunication for awareness, research and advocacy,education and training, documentation, and pollutionmonitoring.

Spurred by the February 2003 report on bottled water andquestions like “if what we found in bottled water was correct,then what about soft drinks?” the CSE’s August 2003 reportclaimed that soft drinks were extremely dangerous to Indiancitizens based on tests conducted at the Pollution MonitoringLaboratory (PML). All samples contained residues of lindane,DDT, malathion, and chlorpyrifos, toxic pesticides andinsecticides known to cause serious long term health issues.Total pesticides in all Coca-Cola brands averaged 0.0150mg/l, 30 times higher than the European EconomicCommission (EEC) limit. PML also tested samples of Cokeand Pepsi products sold in the United States to see if theycontained pesticides and they did not.

Regulations on soft drinks were weak in India, evencompared to bottled water, as neither the Prevention of FoodAlteration Act (PFA) nor the Fruit Products Order (FPO),aimed at regulating food standards in India, addressedpesticides in soft drinks, and there were no standards todefine ‘clean’ or ‘potable’ water. The report called on thegovernment to put in place legally enforceable waterstandards and chastised the multi-nationals for takingadvantage of the situation at the expense of consumer healthand well-being.

Indian Regulatory Environment50

The main law governing food safety in India was the 1954Prevention of Food Alteration Act (PFA) which contained arule regulating pesticides in foods but did not includebeverages. The Food Processing Order (1955) required thatthe main ingredient used in soft drinks be “potable water” butthe Bureau of Indian Standards (BIS) had no prescribedstandards for pesticides in water. One BIS directive stated thatpesticides must be absent and set a limit of 0.001 parts permillion but the Health Secretary admitted, “There are lapsesin PFA regarding carbonated drinks.”51

Indian law enforcement was minimal with virtually noconviction under PFA. In the absence of national standards,NGOs such as the CSE turned to the United States and theEuropean Union for “international norms.” Theappropriateness and feasibility of these standards fordeveloping nations, however, remained a question for many.Under EU food laws for example, milk, fruit, and basic staplessuch as rice and wheat would need to be imported into Indiato satisfy safety standards.

.

Exhibit 1:Center for Science and Environment Press Release

HARD TRUTHS ABOUT SOFT DRINKS

New Delhi, August 5, 2003: After bottled water, it’saerated water that has plugged the purity test. In anotherexposé, Down To Earth has found that 12 major cold drinkbrands sold in and around Delhi contain a deadly cocktailof pesticide residues. The results are based on testsconducted by the Pollution Monitoring Laboratory (PML)of the Centre for Science and Environment (CSE). InFebruary this year, CSE had blasted the bottled waterindustry’s claims of being ‘pure’ when its laboratory hadfound pesticide residues in bottled water sold in Delhiand Mumbai.

This time, it analysed the contents of 12 cold drink brandssold in and around the capital. They were tested fororganochlorine and organophosphorus pesticides andsynthetic pyrethroids — all commonly used in India asinsecticides.

The test results were as shocking as those of bottled water.

All samples contained residues of four extremely toxicpesticides and insecticides: lindane, DDT, malathion andchlorpyrifos. In all samples, levels of pesticide residues farexceeded the maximum residue limit for pesticides inwater used as ‘food,’ set down by the EuropeanEconomic Commission (EEC). Each sample had enoughpoison to cause – in the long term – cancer, damage tothe nervous and reproductive systems, birth defects andsevere disruption of the immune system.

What we found

• Market leaders Coca-Cola and Pepsi had almostsimilar concentrations of pesticide residues. Totalpesticides in all PepsiCo brands on an average were0.0180 mg/l (milligramme per litre), 36 times higherthan the EEC limit for total pesticides (0.0005 mg/l).Total pesticides in all Coca-Cola brands on an averagewere 0.0150 mg/l, 30 times higher than the EEC limit.

• While contaminants in the ‘Dil mange more’ Pepsi were37 times higher than the EEC limit, they exceeded thenorms by 45 times in the ‘Thanda matlab Coca-Cola’product.

• Mirinda Lemon topped the chart among all the testedbrand samples, with a total pesticide concentration of0.0352 mg/l.

The cold drinks sector in India is a much bigger money-spinner than the bottled water segment. In 2001, Indiansconsumed over 6,500 million bottles of cold drinks. Itsgrowing popularity means that children and teenagers,who glug these bottles, are drinking a toxic potion.

PML also tested two soft drink brands sold in the US, tosee if they contained pesticides. They didn’t.

The question, therefore, is: how can apparently quality-conscious multinationals market products unfit for humanconsumption?

CSE found that the regulations for the powerful andmassive soft drinks industry are much weaker, indeednon-existent, as compared to those for the bottled waterindustry. The norms that exist to regulate the quality ofcold drinks are a maze of meaningless definitions. This“food” sector is virtually unregulated.

The Prevention of Food Adulteration (PFA) Act of 1954, orthe Fruit Products Order (FPO) of 1955 – both mandatoryacts aimed at regulating the quality of contents inbeverages such as cold drinks – do not even provide anyscope for regulating pesticides in soft drinks. The FPO,under which the industry gets its licence to operate, hasstandards for lead and arsenic that are 50 times higherthan those allowed for the bottled water industry.

What’s more, the sector is also exempted from theprovisions of industrial licensing under the Industries(Development and Regulation) Act, 1951. It gets a one-time license to operate from the ministry of foodprocessing industries; this license includes a no-objectioncertificate from the local government as well as the statepollution control board, and a water analysis report. Thereare no environmental impact assessments, or citingregulations. The industry’s use of water, therefore, is notregulated.

Source: CSE Press Release, “Hard Truths about Soft Drinks,” 8/5/03.

The Initial Response

The day after the CSE announcement, Coke and Pepsi cametogether in a rare show of solidarity at a joint pressconference. The companies attacked the credibility of the CSEand their lab results, citing regular testing at independentlaboratories proving the safety of their products. Theypromised to provide this data to the public, threatened legal

action against the CSE while seeking a gag order, andcontacted the United States Embassy in India for assistance.Coca-Cola India’s CEO Sanjiv Gupta published the followingstatement for the Indian public: 52

You may have seen recently in the media some allegationsabout the quality standards of our products in India. Wetake these allegations extremely seriously. I want toreassure you that our products in India are safe and are

.

tested regularly to ensure that they meet the same rigorousstandards we maintain across the world.

Maintaining quality standards is the most importantelement of our business and we cannot stand by whilemisleading and unaccredited data is used to discredittrusted and world-class brands. Recent allegations havecaused unnecessary panic among consumers in India and,if unchecked, would impair our business in India andimpact the livelihoods of our thousands of employeesacross the country.

This site is about the truth behind the headlines. Itprovides some context and facts on these issues and wehope it helps you understand exactly why you can trustour beverage brands and continue to enjoy them asmillions of Indians do each day.

– Sanjiv Gupta, Division President, Coca-Cola India

In the following days, the Delhi High Court asked thegovernment to convene an expert committee to test andreport on the safety of soft drinks within three weeks and torevise existing standards to include pesticide norms. Coca-Cola and Pepsi launched independent campaigns to reassurethe public, taking out full-page newspaper advertisementsand directing consumers to their corporate Web sites toreview test results and safety protocol in greater detail (SeeExhibits 10 and 11). In spite of these actions, the publicseemed to believe the CSE’s claims and the crisis was far fromover for the beverage giants. With sales continuing toexperience a precipitous drop, one Delhi medical student’ssentiments appeared to be widespread: “For a person drinkingat least one bottle a day, the report came as a rude shock. Ihaven’t picked up a bottle today and most definitely will notconsume soft drinks in the future. The reports of pesticidesand other pollutants have made soft drinks a strict no-no andwe will now stick to juices and plain drinking water.”53

Exhibit 2: Pesticide Content in Twelve Leading Soft Drink Brands

Source: CSE Press Release, “Hard Truths about Soft Drinks,” 8/5/03.

0.0400

0.0350

0.0300

0.0250

0.0200

0.0150

0.0100

0.0050

0.0000Pepsi Mountain Diet Mirinda Mirinda Blue 7-Up Coca-Cola Fanta Limca Sprite Thums Up

Dew Pepsi orange lemon Pepsi

Total organochlorine pesticides

Total organophosphorus pesticides

Total pesticides

EEC limit for total pesticides 0.0005 mg/l

Brands

Res

idu

es (

mg

/l)

Cold comfortPesticides in soft drink brands in India

0.0187

0.0141

0.0071

0.0196

0.0362

0.0147

0.0055

0.0111

0.0148

0.02140.0223

0.0166

.

Gupta’s Dilemma

As he contemplated the crisis at hand, Sanjiv Guptaquestioned what action if any was necessary. Coke India waswell within the country’s legal guidelines and the crisis hadnot been widely reported outside of India. Gupta knew thatthe Indian public had a short attention span and had reasonto think that it wouldn’t be long before the CSE’s reportfaded, just as the Kinley water issue had earlier this year.

On the other hand, he wondered if the situation might offerthe company an opportunity to display higher standards ofsocial responsibility at a time when it needed to differentiateitself from the competition. Multinationals had slipped innumerous situations of late and were blamed for notadhering to the same standards in developing countries as inindustrialized nations. The additive effect of this negativepress meant that the potential damage to Coke’s reputationwas even greater. Finally, an ineffective resolution would be adevastating blow to the momentum Coke had gained afterthree long years of work on the marketing front.

2002 2001 2000

Net Operating Revenues 19,564 17,545 17,354

Cost of Goods Sold 7,105 6,044 6,204

Gross Profit 12,459 11,501 11,150

Selling, general, and administrative expenses 7,001 6,149 6,016

Other operating changes ,000 ,000 1,443

Operating Income 5,458 5,352 3,691

Interest Income 209 325 345

Interest Expense 199 289 447

Equity Income (loss) 384 152 (289)

Other Income (loss)–net (353) 39 99

Gains on issuances of stock by equity investee 0 91 0

Income before income taxes and cumulative effect of accounting change 5,499 5,670 3,399

Income Taxes 1,523 1,691 1,222

Net Income before cumulative effect of accounting change 3,976 3,979 2,177

Cumulative effect of accounting change for SFAS No. 142 net of income taxes:

Company operations (367) 0 0

Equity investments (559) 0 0

Cumulative effect of accounting change for SFAS No. 133 net of income taxes: 0 (10) 0

Net Income 3,050 3,969 2,177

Basic Net Income per share

Before accounting change 1.60 1.60 0.88

Cumulative effect of accounting change (0.37) 0 0

1.23 1.60 0.88

Diluted net income per share

Before accounting change 1.60 1.60 0.88

Cumulative effect of accounting change (0.37) 0 0

1.23 1.60 0.8

Average shares outstanding 2478 2487 2477

Effect of dilutive securities 5 0 0

Average shares outstanding assuming dilution 2483 2487 2487

Exhibit 3: The Coca-Cola Company Income Statement(in millions $ except per share data)

.

Rank Company 2003 Brand Value ($Billion) 2002 Brand Value ($Billion) Percent Change Country of Ownership

1 Coca-Cola 70.45 69.64 +1% U.S.

2 Microsoft 65.17 54.09 +2 U.S.

3 IBM 51.77 51.19 +1 U.S.

4 GE 42.34 41.31 +2 U.S.

5 Intel 31.11 30.86 +1 U.S.

6 Nokia 29.44 29.97 -2 Finland

7 Disney 28.04 29.26 -4 U.S.

8 McDonald’s 24.70 26.38 -6 U.S.

9 Marlboro 22.18 24.15 -8 U.S.

10 Mercedes 21.37 21.01 +2 Germany

Exhibit 4: Interbrand’s Global Brand Scoreboard 2003

Source: Interbrand’s Global Brand Scorecard, 2003. BusinessWeek, 8/4/03.

Exhibit 5: Rountine tests carried out by bottling operations and external laboratories

Process Parameter No. of tests

1 Water 71

2 Water Treatment & Auxiliary Chemicals 68

3 CO2 50

4 Sugar 13

5 Syrup 17

6 Packaging Material 25

7 Container Washing 17

8 Finished Product 18

9 Market Samples 15

10 External Lab 147

TOTAL 441

Source: The Coca-Cola Company; http://www.myenjoyzone.com

Exhibit 6: Soft Drink Sales in India

Fiscal Year Million Bottles Sold

1998-1999 5670

1999-2000 6230

2000-2001 6450

2001-2002 6600

2002-2003 10000

Source: “Soft drink sales up 10.4%,” PTI, 9/29/04.

Exhibit 7: Thanda Matlab Coca-Cola AdvertisingCampaign, Print Media

Source: McCann-Erickson Worldwide Web site

.

Exhibit 8: Coca-Cola Principles of Corporate Citizenship

Our reputation is built on trust. Through good citizenshipwe will nurture our relationships and continue to build thattrust. That is the essence of our promise — The Coca-Cola Company exists to benefit and refresh everyone ittouches.

Wherever Coca-Cola does business, we strive to betrusted partners and good citizens. We are committed tomanaging our business around the world with aconsistent set of values that represent the higheststandards of integrity and excellence. We share thesevalues with our bottlers, making our system stronger.

These core values are essential to our long-term businesssuccess and will be reflected in all of our relationships andactions — in the marketplace, the workplace, theenvironment and the community.

Marketplace

We will adhere to the highest ethical standards, knowingthat the quality of our products, the integrity of our brandsand the dedication of our people build trust andstrengthen relationships. We will serve the people whoenjoy our brands through innovation, superb customerservice, and respect for the unique customs and culturesin the communities where we do business.

Workplace

We will treat each other with dignity, fairness and respect.We will foster an inclusive environment that encourages allemployees to develop and perform to their fullestpotential, consistent with a commitment to human rightsin our workplace. The Coca-Cola workplace will be aplace where everyone’s ideas and contributions arevalued, and where responsibility and accountability areencouraged and rewarded.

Environment

We will conduct our business in ways that protect andpreserve the environment. We will integrate principles ofenvironmental stewardship and sustainable developmentinto our business decisions and processes.

Community

We will contribute our time, expertise and resources tohelp develop sustainable communities in partnership withlocal leaders. We will seek to improve the quality of lifethrough locally-relevant initiatives wherever we dobusiness.

Responsible corporate citizenship is at the heart of TheCoca-Cola Promise. We believe that what is best for ouremployees, for the community and for the environment isalso best for our business.

Source: Coca-Cola Company Web site

Exhibit 9: Corporate Communications at Coca-Cola

Source: Case writer derived from Coca-Cola Company Web site

Assistant VP &Director,

Media Relations

Director, Health & Nutrition

Communications

Director,Financial

Communications

Director,Marketing

Communications

Director, NorthAmerica

Communications

Director,Asia

Communications

Senior Manager,Public Affairs &

Communications,Coca-Cola India

SVP WWPublic Affairs &

Communications

.

Since August 5, 2003 the quality and safety of Coca-Colaand PepsiCo products in India have been called intoquestion by a local NGO, the Centre for Science andEnvironment (CSE). The basis of the allegations are testsconducted on products of Coca-Cola and PepsiCo by CSE’sinternal unaccredited laboratory, the Pollution MonitoringLaboratory.

In India, as in the rest of the world, our plants use a multiplebarrier system to remove potential contaminants andunwanted natural substances including iron, sulfur, heavymetals as well as pesticides. Our products in India are safeand are tested regularly to ensure that they meet the samerigorous standards we maintain across the world.

The result of these allegations has been consumer confusion,significant impact on the sale of a safe and high-qualityproduct, and the erosion of international investor confidencein the Indian business sector. This situation calls for thedevelopment of national sampling and testing protocols forsoft drinks, an end to sensationalizing unsubstantiatedallegations, and co-operation by all parties concerned in theinterests of both Indian consumers and companies withsignificant investments in the Indian economy.

The facts versus the fiction statements made in recent weekshave led to false perceptions by Indian consumers:

Exhibit 10: Myths and Facts from Coca-Cola India Web site

Myth Coca-Cola products in India contain pesticide residuesthat are above EU norms.

Fact Throughout all of our operations in India, stringentquality monitoring takes place covering both thesource water we use as well as our finished product.We test for traces of pesticide in groundwater to thelevel of parts per billion. This is equivalent to one dropin a billion drops. For comparison’s sake, this wouldalso be equivalent to measuring one second in 32years, or less than one person in the entire populationin India. These tests require specialized equipment ataccredited labs to have accurate results. Even at thesestringent miniscule levels we are well within theinternationally accepted safety norms.

Myth Coca-Cola products sold in India are “toxic” and unfitfor human consumption.

Fact There is no contamination or toxicity in our beveragebrands. Our high-quality beverages are — and havealways been — safe and refreshing. In over 200countries across the globe, more than a billion timesevery day, consumers choose our brands forrefreshment because Coca-Cola is a symbol of quality.

Myth Coca-Cola has dual standards in the production of itsproducts, one high standard for western countries,another for India.

Fact The soft drinks manufactured in India conform to thesame high standards of quality as in the USA andEurope. Through our globally accepted and validatedmanufacturing processes and Quality Managementsystems, we ensure that our state-of-the-artmanufacturing facilities are equipped to provide theconsumer the highest quality beverage each time. Westringently test our soft drinks in India at independent,accredited and world-class laboratories both locallyand internationally.

Myth In India the soft drinks industry is virtually unregulated.

Fact There are no standards for soft drinks in the US, theEU, or India. In India, water used for beverage

manufacture must conform to drinking waterstandards. The water used by Coca-Cola conforms toboth BIS and EU standards for drinking water and ourproduction protocols ensure this through a focus onprocess control and testing of the water used in ourmanufacturing process and the final product quality.

Myth Coca-Cola has put out results for Kinley water only andnot for their soft drinks.

Fact The results of product tests conducted by TNONutrition and Food Research Laboratory in theNetherlands is conclusive and is available on TheScience Behind Our Quality Web page.

Myth International companies like Coca-Cola are“colonizing” India.

Fact The Coca-Cola business in India is a local business.Our beverages in India are produced locally, weemploy thousands of Indian citizens, our product rangeand marketing reflect Indian tastes and lifestyles, andwe are deeply involved in the life of the localcommunities in which we operate. The Coca-Colabusiness system directly employs approximately10,000 local people in India. In addition, independentstudies have documented that, by providingopportunities for local enterprises, the Coca-Colabusiness also generates a significant employment“multiplier effect.” In India, we indirectly createemployment for more than 125,000 people in relatedindustries through our vast procurement, supply anddistribution system.

Myth Farmers in India are using Coca-Cola and other softdrinks as pesticides by spraying them on their crops.

Fact Soft drinks do not act in a similar way to pesticideswhen applied to the ground or crops. There is noscientific basis for this and the use of soft drinks forthis purpose would be totally ineffective. In India, as inthe rest of the world, our products are world class andsafe and the treated water used to make our beveragesthere meets the highest international standards.

Source: Coca-Cola Company Website

.

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Argenti, Paul A.. Collaborating with Activists: How Starbucks Works with NGOs.California Management Review, Vol. 47, No. 1, Fall 2004.

Bhatia, Gauri. Multinational Corporations: Pro or Con? Outlook India, October 29, 2003.

BusinessWeek Online, Things Aren’t Going Better with Coke, June 28, 1999

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ENDNOTES

1. “Toxic effect: Coke sales fall by a sharp 30-40%.” The Economic Times, 8/13/03, p. 1

2. “Controversy-ridden year for soft drinks.” Business Line, New Delhi, 12/30/03, p.6

3. “Toxic effect.”

4. “Hard Truths About Soft Drinks.” Center for Science and Environment, PressRelease, 8/5/03.

5. “No standards for world-wide pesticide residues in soft-drinks.” Business Line, NewDelhi, 10/3/03, p. 9.

6. “Coke & Pepsi in India: Pesticides in Carbonated Beverages.”http://www.vedpuriswar.org/articles/Indiancases retrieved 12/7/04

7. “Tests show pesticides in soft drinks, claims CSE,” Economic Times, 8/6/03, p. 1.

8. “Coke & Pepsi in India: Pesticides in Carbonated Beverages.”

9. http://www.indiastat.com

10. “Coca-Cola India.” Nymph Kaul, 2004 and Coca-Cola Company Web site:http://www2.coca-cola.com/heritage/ and Pendergrast, For God and Coca-Cola.Charles Scribner’s, 1993.

11. http://www2.coca-cola.com/ourcompany/aroundworld.html

12. Pendergrast, 172.

13. Ibid.

14. Ibid., 199.

15. Ibid., 200-201.

16. “The Top 100 Brands: Interbrand Brand Scorecard 2003.” Interbrand SpecialReport, as seen in BusinessWeek 8/4/03.

17. Ibid.

18. The World’s Greatest Brands, A Review by Interbrand. Edited by Nicholas Kochan.

19. Strategic Grand Management. Kevin Lane Keller, p. 153.

20. http://www.portobello.com.au/portobello/reading/memorabilia_cocacola.htm

21. “Brands of Coca-Cola in India,” Rai University, 11/04.

22. http://www.coca-colaindia.com

23. Sanjiv Gupta Biography, Rai University.

24. “Coca-Cola India to Double Capacity,” Kolkata, 3/8/03

25. http://www.coca-colaindia.com

26. Gupta Bio

27. http://www.indiastat.com

28. Ibid.

29. Ibid.

30. “Broken commitments: The case of Pepsi in India.” Kavaljit Singh, PIRG Update,May 1997

31. Interview with Nymph Kaul, 9/20/04

32. Coca-Cola India Internal Marketing Presentation.

33. Ibid.

34. Kaul.

35. Kaul.

36. Ibid.

37. http://www.coca-colaindia.com

38. Ibid.

39. Ibid.

40. “The Corporate Web site as an Image Restoration Tool.” Nicola K. Graves andRandall L. Waller, 2004.

41. “Coca-Cola accused of a ‘companywide pattern.’” Unger, H., The Atlanta Journal-Constitution, p. H1, (1999am April 24)

42. “The real thing: Truth and power at the Coca-Cola Company,” Hays, C. L., NewYork: Random House 2004.

43. Ibid.

44. “Coke crisis: Equity erodes as brand troubles mount.” MacArthur, K. & Linnett, R.,Advertising Age, p. 3, 4/24/00.

45. “Coke & Pepsi in India: Presticides in Carbonated Beverages,” p. 8.

46. “Pure Water or Pure Peril,” CSE press release 2/03.

47. Ibid.

48. “Collaborating with Activists: How Starbucks Works with NGOs,” Argenti, Paul A.,CMR, Fall 2004.

49. http://www.cseindia.org

50. “Coke & Pepsi in India: Pesticides in Carbonated Beverages,” p. 3.

51. “The Gulp War,” Supriya Bezbaruat and Malini Goyal, India Today, 8/25/03, pp. 50-53.

52. http://www.coca-colaindia.com

53. “Shocked Dehlites Stay Away from Soft Drinks,” The Hindu, New Delhi, 8/07/03, p.1.

.

Alexandra RansonFaculty Adviser: Elizabeth Powell

Darden Graduate School of BusinessUniversity of Virginia

Euronext N.V.: The Fight for LIFFE

WINNING ENTRIES – BUSINESS SCHOOLS

Thierry Barthez, director of communications for Euronext N.V.,

rubbed his weary eyes and watched Brussels station slide past the

windows of his first class carriage as the Thalys TGV slowly gathered

speed. The last 48 hours had been a whirlwind of activity, and there

was still a lot to think about on the journey back to Paris. Euronext

had made huge strides in its first year since it was formed from the

merger of the Paris, Amsterdam and Brussels stock exchanges, and

had confounded many doubters along the way. But now Euronext

faced an even greater challenge: Indeed, its very survival could

depend on the strategy and powers of persuasion of Barthez and his

boss Jean François Théodore, the chief executive of Euronext, over

the next few weeks.

It was August 2001, and Barthez had just been starting to relax on

his summer vacation in the South of France when Théodore had

called from Paris with the news that LIFFE (the London

International Financial Futures and Options Exchange), one of the

world’s busiest derivatives exchanges, was about to put itself up for

auction.1 Barthez could clearly recall the excitement in his boss’s

voice, and the rush of adrenalin he himself had felt on hearing the

news. Théodore wanted Euronext to be the leader in what he saw as

the inevitable consolidation of its industry – creating a pan-national

stock exchange that would allow cheap and easy trading across

borders. But it was difficult and costly to start a new exchange from

scratch that could seriously challenge an existing national exchange

in its own market, and established exchanges rarely came up for sale

– particularly not ones of the high caliber of LIFFE. That made this

opportunity, both men knew, too good to miss.

Before he allowed himself to get too excited, however, Barthez once

again reminded himself that both of Euronext’s main rivals, the

London Stock Exchange plc (LSE) and Deutsche Börse AG (DBAG),

would also be very interested in a prize asset like LIFFE – and both

probably had access to larger acquisition war-chests than Euronext.

He also was very well aware that the same powerful interests in the

City of London that would surely decide the future of LIFFE had

recently vetoed a proposed merger between the LSE and DBAG, and

a hostile takeover bid for the LSE from OM Gruppen of Sweden.

Was it possible that a foreign company could take control of one of

the United Kingdom’s flagship institutions – and if so, what would it

take to get the deal done?

Beckoning a steward over, Barthez decided to review what he knew

about LIFFE over a well-deserved aperitif as he considered how

Euronext should approach this auction. Théodore had always relied

on his communications chief as one of his key strategic advisers, and

in this case, it was clear that the processes of formulating the bid and

communicating it would have to be virtually inseparable. Barthez

knew his boss would be expecting him to come up with a plan in the

next 48 hours.

The London International Financial Futuresand Options Exchange (LIFFE)

LIFFE (pronounced ‘life’) was established in 1982, following the

removal of foreign exchange controls in the UK.2 LIFFE offered

companies and financial institutions a way to manage their exposure

to foreign exchange and interest-rate volatility by offering derivative

contracts on interest rates denominated in most of the world’s major

currencies. During the 1990s, LIFFE had added equity options and

commodities to its product range and by 2001, had grown to

become the third largest derivatives market in Europe (after DBAG’s

Eurex and Euronext itself).

For the first 16 years of its life, trading on LIFFE was by “open

outcry,” with crowds of shouting, gesturing dealers standing in

trading pits similar to those used by the commodity traders of the

Chicago Mercantile Exchange (see Exhibit 1). In November 1998,

LIFFE closed its last trading pit and switched to an extremely

advanced electronic trading platform called CONNECT (see Exhibit

2). LIFFE was very proud of CONNECT, which it had developed in-

house, and it hoped to license the technology to other derivative

exchanges elsewhere in the world.

Shortly after the switch to electronic trading, the exchange’s

structure also changed dramatically. Historically, shareholders in

.

LIFFE had had to be also members of the LIFFE market, with the

right to trade. In February 1999, this requirement was ended, which

enabled non-members for the first time to invest in LIFFE purely for

financial return. As a result, LIFFE was fast becoming more of a

profit-oriented, commercial organization, and — unusually for a big

exchange — its two largest shareholders were now US-based venture

capital firms (see Exhibit 3).

Why LIFFE?

There were several reasons why Euronext was so interested in LIFFE.

First, it would provide a valuable presence in London, the dominant

financial center in the European time zone. Second, Euronext’s

revenues (see Exhibit 4) were particularly vulnerable to volatility

and weak conditions in the equity markets. Derivatives markets,

however, were much less volatile than equity markets. ABN AMRO

equity analysts argued that:

...it is of strategic importance for Euronext to be better

diversified and to capture a larger part of its revenues from

derivatives trading... For Euronext the UK is very important

and they believe they have to be present there, either by

starting from scratch or through a corporate deal.3

In addition, LIFFE’s operation was extremely professional,

technologically advanced, and its management were highly rated.

Barthez did not have many contacts there himself, but he knew

Théodore was reasonably familiar with both the top men at LIFFE.

Its chairman, Sir Brian Williamson, was an extremely well respected

City veteran, who, with his tough South African-born CEO Hugh

Freedberg, had been the driving force behind the revival of LIFFE in

the last three years. Although LIFFE’s Board, made up of its major

shareholders, would of course have the final say, Williamson and

Freedberg would be responsible for assessing the merits of the bids

and making a recommendation.

The Birth of Euronext

As he contemplated the possibility of acquiring LIFFE, Barthez

reminded himself that Euronext itself was not yet even a full year

old. It was only on September 22, 2000, that the stock exchanges of

Paris, Amsterdam and Brussels had merged together to form

Euronext, the first cross-border cash (equities) and derivatives

exchange in Europe. The enormous potential benefits of being able

to trade on a single market, seamlessly, across borders were clear:

more liquidity and lower transaction costs for the financial

institutions who were the main customers of exchanges. However,

the merger nevertheless attracted a lot of comment and debate in

the industry for two reasons in particular.

Firstly, stock exchanges had always been regarded as national

flagship assets, whose ownership and control were tightly held and

guarded.4 As one industry commentator noted “the trouble with

national exchanges is that they embody national pride and psyche.

British and Americans can hardly conceive of the death of their own

markets.”5

As a result, by the fall of 2000 there were still over 30 independently

operated exchanges in Europe (see Exhibit 5). Mergers between

exchanges could not go ahead without the consent of the exchanges’

largest shareholders, key customers (who were usually the largest

shareholders too), the respective governments, and various

regulatory authorities in each country. Until Euronext’s merger,

there had been considerable skepticism that obtaining the necessary

approvals from all these groups would ever be politically possible.

It had, of course, helped Euronext that France, the Netherlands and

Belgium were all founder members of the European Community,

and had since then been consistently at the frontline of the

movement towards a stronger, more centralized European Union.

However, attitudes towards European integration and standard-

ization varied widely across the member nations of EU, and it was

far from clear that such a deal would have been politically feasible

elsewhere.

Secondly, for Euronext signing the merger deal was just the tip of the

iceberg. Delivering the promise of seamless cross-border trading was

still to come. The technological challenge would be very complex.

Harder still, trading on exchanges, and the management of the

exchanges, had always been governed by different regulatory bodies

and laws in each country. Euronext therefore had to find a way to

achieve substantial regulatory and legal harmonization between

each of the territories in which it operated.

Euronext’s Initial Public Offering and the Outlook for its Industry

Euronext’s IPO had taken place just seven weeks ago, on July 5,

2001.6 In one sense, the offering was successful, because it had raised

about €664 million in cash for the exchange. Since flotation, it was a

bleaker story, with Euronext stock falling in value by almost 25

percent. Investors were worried whether Euronext would be able to

overcome the structural barriers described above to create a truly

integrated cross-border exchange, whether it would be able to

integrate the complex IT systems of the three exchanges, and whether

the organizational structure of the new company was really viable.

Despite these genuine concerns, most analysts believed that

Euronext’s vision was the right one, if it could just survive the short

to medium term. The speed and efficiency of the world’s traded

exchanges had increased dramatically over the last 20 years, thanks

to continual technological advances. Still, there were more, huge

potential gains in cost and efficiency, which could never be realized

without cross-border and/or cross-product consolidation (see

Exhibit 6). The economics were simple: The larger a pool of

transactions, the more liquid and efficient the market would be —

.

and the cheaper the transactions would cost. In a world with just

two or three consolidated international exchanges, global financial

institutions like Citigroup or Morgan Stanley could save the overhead

costs of running separate accounts with up to a hundred different

exchanges in different countries, and even better, the costs of having

to buy or build multiple IT systems to interface with each exchange.

As Peter Lewis, Head of Global Program Trading at SG

Securities observed:

...the situation in Europe, of about 30 exchanges, market

segments and trading platforms supported by 26 clearing and

settlement houses, is not sustainable in the long term... At

present, it is hard to pick a winner in the race to become the

pan-European stock exchange of choice. However, it is exactly

the funds raised from the listings of the Deutsche Börse,

Euronext and others that, if spent wisely, will provide the

investment in technology and services needed to distinguish

one operator from the rest.”7

The questions on everyone’s mind were not if this consolidation

would gain momentum, but when; and who would be the

consolidated, and who would be the consolidators? Massive,

powerful exchanges like the New York Stock Exchange, the Chicago

Mercantile Exchange and Deutsche Börse would appear to have the

natural advantage, but Euronext had the benefit of a head start, and

it was far from complacent.

Euronext’s Technology

Because a merger like the Euronext project had never before been

attempted – many analysts doubting whether it could be done at all

– Euronext had provided a lot of information on its integration

plans at the time of its IPO (see Exhibit 7).

Critical to the efficiencies and synergies from the merger would be

IT. The object was to end up with three group-wide IT platforms,

one for cash trading (equities), one for derivative trading, and one

for clearing.8 Euronext hoped that Clearing 21, the system that

would be used to clear all trades in its products, would be fully

operational by July 2002. Euronext had developed a state-of-the-art

cash trading platform, NSC, which was already almost completely

working in Paris, Brussels and Amsterdam. However, the big

challenge would be with derivatives trading, which would require a

much more sophisticated system than NSC. Euronext had decided

to build on two older platforms to create a new one, known as NDS.

Migrating to NDS would be extremely complex, and would not be

completed for at least another 12 months. Euronext had much still

to prove about its ability to meet the large number of integration

deadlines on the horizon.

Euronext’s Organizational Structure

Going into the Euronext merger in 2000, Jean-François Théodore

had been the CEO of the Paris Bourse, the biggest exchange of the

three. A former senior civil servant, who maintained a low public

profile, Théodore had been the principal driver in conceiving the

deal and in negotiating to get it done. As communications director

of the Paris Bourse at the time, Barthez could still recall the painful

compromises in the organizational design of the company which

had been required to get the necessary agreements for the merger

(see Exhibit 8).

For example, the chief executives of the Paris, Brussels and

Amsterdam exchanges had agreed to rotate the office of Euronext

chief executive between them every three years, with Théodore

taking the first turn. Euronext decided it would operate in three

official languages: English, French and Dutch, and in three

corporate headquarters, in Paris, Brussels and Amsterdam.

Euronext’s equities operations would be run from Paris; its

derivatives operations would be run from Amsterdam, under the

direction of the former Amsterdam CEO, George Möller; and the

former Brussels CEO, Olivier Lefebvre, was charged with the very

complex task of IT integration across the businesses.

Although Euronext made efforts to encourage organizational

integration, such as encouraging cross-border teams to rotate the

location of their meetings between cities, critics of the company

were concerned that this structure would preserve national silos and

prevent true integration. Others believed that the CEO rotation

system was impractical and could cause uncertainty and instability.

And now Euronext was a public company, Barthez was facing the

headache of where and how to communicate the financial results to

all the different media, investor and analyst audiences.

Perhaps the biggest question for Euronext was this: How could this

unconventional organizational structure cope with any more

acquisitions? Théodore had big ambitions. If Euronext were to be a

key player in the consolidation of the global stock exchange

industry, it would need an organizational model, which would

encourage more exchanges to join Euronext, while also having an

effective management structure with the power to take the decisions

necessary to achieve integration. It was a delicate balance to strike.

BVLP (Bolsa de Valores de Lisboa e Porto):The Acquisition Strategy Begins

As Barthez traveled back to Paris that hot August day, the situation

in London was not the only issue on his mind. Merger negotiations

had been underway for some time with the BVLP, the Portuguese

Stock Exchange, and it looked very likely that a deal would soon be

done. Although a relatively small exchange which would, if the

.

merger went ahead, add less than six percent to Euronext’s revenues,

the acquisition of BVLP was nonetheless viewed as strategically

significant. BNP Paribas put it this way:

The inclusion of Portugal in the Euronext block leaves only

Spain as the odd one out. With the Spanish financial market

under re-organization, BVLP puts Euronext in a more

favorable position to continue its role as the European

consolidator.9

Although the acquisition of BVLP was a promising development, it

did raise questions for Barthez about how it might affect the

complex and delicate integration plans already underway for the rest

of the group. Even his department, Communications, was already

struggling to coordinate its activities across three countries. He

couldn’t help feeling a sense of dread as he wondered where he

would find a reliable Dutch-to-Portuguese translator....

Euronext’s Rivals

Unfortunately for Euronext, it was not the only stock exchange

attempting to be the “European consolidator.” Two more stock

exchanges were jostling for the same position: the UK’s London

Stock Exchange and Deutsche Börse of Germany. Barthez knew

both companies fairly well, but thought he should review what he

knew in the light of the news about LIFFE.

The London Stock Exchange (LSE)

As well as being the largest and most liquid cash equity market in

Europe, the LSE was also was one of the most venerable financial

institutions in the world. As one English newspaper columnist said,

“Like the Queen and steak-and-kidney pudding, the LSE is part of

our heritage.”10

Although organized stock trading was taking place in the

coffeehouses of the City of London as early as the 17th century, the

LSE was founded in 1801. Trading proceeded in much the same way

for almost 200 years, until “Big Bang” in 1986, when the LSE ended

face-to-face dealing on a physical trading floor (as still used by

NYSE) and switched to an electronic trading system conducted over

the phone and computer between different dealing rooms.

Deregulation accompanied this shift, and for the first time outside

corporations were allowed to own LSE member firms.

Between 1991 and 2001, the LSE was transformed from a mutually

owned cooperative of member firms to a listed public company. In

1991, its governing council was replaced with a board of directors

drawn from the exchange’s executive, customer and user base. Then,

in 1998, member firms voted to demutualize and re-incorporate the

LSE as a public limited company. A limited trading facility was put

in place to enable member firms to buy and sell each other’s shares

in the LSE.

Meanwhile, in July 1998 the LSE and DBAG had announced plans to

form a strategic alliance “to harmonize the markets for their leading

securities and, ultimately to develop a joint electronic trading

platform.”11 This was taken a step further in May 2000, when the

LSE and DBAG announced a planned “merger of equals” to be

known as iX.12

The iX proposal was instantly unpopular among many in the City of

London, who were concerned that the Germans would have

dominance in the so-called merger of equals. The smaller member

firms of the LSE, who still controlled more than enough votes to

block the deal, were also opposed to the deal, complaining that the

LSE would be giving up its own trading system, SETS, and switching

to DBAG’s technology Xetra. The LSE was still struggling to gain

shareholder approval for the deal when, in August 2000, it received

an unexpected hostile takeover bid from OM Gruppen, the Swedish

technology company which operated the Stockholm Stock

Exchange. LSE was forced to scrap the plans for iX, and concentrate

on fighting what turned out to be an ugly takeover battle with OM.

Finally, in November 2000, OM’s bid lapsed, having received

insufficient acceptances of its offer from the LSE’s shareholders.

By 2001, therefore, the LSE was still independent, but in a badly

compromised position. Only a few months ago its CEO, Gavin

Casey, had argued, “the days of national stock exchanges are

numbered. Now what people want is pan-European trading and the

ability to trade on a global basis.”13 In this light, it was hard for the

LSE to argue convincingly that its prospects were as good on its

own, particularly as it was heavily dependent on income from

trading on UK cash equity markets and listing fees.14

The LSE board’s answer was to replace Casey with a new chief

executive in January 2001, career securities banker Clara Furse. Her

most pressing tasks were to prepare the LSE for its IPO in July 2001

and more importantly, to try to preserve the LSE’s independence by

finding ways to broaden its revenue base. Making the right strategic

acquisition would be the obvious solution. ABN AMRO

summarized:

[For the LSE], winning LIFFE would provide ammunition

against the ambitions of DBAG and Euronext that are far

more integrated horizontally as well as vertically. Further,

following the success of Euronext’s merger, and the stumbling

blocks of last year’s negotiations for the LSE, it needs to prove

it can generate momentum in the consolidation process.

LIFFE would clearly provide much needed scale and product

diversification.15

.

Vincent Boland, the stock exchange correspondent for the Financial

Times additionally observed:

A takeover of [LIFFE] would complete a stunning

turnaround for London’s stock market. ...Since the

appointment of Clara Furse as chief executive at the start of

this year, the ship has been steadied. Ms. Furse is enjoying a

relatively long honeymoon with shareholders and has steered

its transformation into a proper company in search of

shareholder value. There is a widespread view in the City that

acquiring LIFFE, if the right deal can be done at the right

price, would be a big step in that direction.

About a third of outstanding contracts on LIFFE’s products

on July 31 were based on equities. Many of those were based

on LSE-listed stocks and the FTSE range of indices. Analysts

say there are obvious synergies from adding this stable of

products to the LSE.

The LSE, conscious that its competitors in Europe —

Deutsche Börse and Euronext — are multi-product

operators, may also want to acquire LIFFE’s stable of fixed-

income derivatives products. The LSE is the most attractive of

Europe’s stock exchanges because it runs the biggest and most

liquid stock market. But even after its listing, it is not

necessarily the strongest exchange in strategic terms. The

more of LIFFE’s products it acquired, the stronger would be

its hand in the inevitable consolidation that will take place

among European stock exchanges.

LIFFE’s two largest shareholders, with a combined interest of

just under 30 percent, are the venture capital houses Battery

Ventures and Blackstone Group. Other significant

shareholders, who will be influential if a deal is to be done, are

the futures broking operations of Gedon Hertshten, Roger

Carlsson and Michael Spencer, three veterans of the futures

markets.16

There was little doubt in anyone’s mind that the LSE would be

desperate to acquire LIFFE: Indeed, there had been rumors linking

the two exchanges all summer. Furse was very familiar with her

target, as only two years before she had served as LIFFE’s deputy

chairman for two years and as a board director for nine years. The

prospect of bringing LIFFE and the LSE together to create a national

cash and derivatives exchange was bound to be appealing to many,

particularly since both exchanges used the same central clearing

counter-party (which could massively simplify integration). Their

product offerings complemented one another; and both were

English-speaking, trading in the same currency, located only a few

minutes apart in the City of London and were subject to the same

regulatory body, the UK Financial Services Authority. Given these

advantages, Barthez had to admit to himself that the LSE was very

likely to be the front-runner in the fight for LIFFE.

Deutsche Börse A.G. (DBAG)

The position of Deutsche Börse was less clear. Based in Frankfurt,

Germany, Deutsche Börse was the second largest cash market in

Europe, and had a strong technology division called Systems AG,

which designed, built and operated IT solutions for other stock

exchanges, including the Chicago Board of Trade, the Irish Stock

Exchange, the Vienna Stock Exchange and the Helsinki Stock

Exchange.

In 1998, DBAG and the Swiss Exchange had jointly created the

world’s first cross-border derivatives market, Eurex. In three years,

Eurex had grown to be the world’s largest financial derivatives

exchange, trading over 674 million derivative contracts in 2001 and

contributing around 35 percent of DBAG’s revenues.17

DBAG launched an IPO on February 5, 2001, raising over €980m to

put towards expansion activities.18 Flush with these funds, DBAG

clearly had the financial resources to buy LIFFE, and, as

demonstrated by its attempts in 2000 to merge with the LSE, its

ambitions were big. However, its Eurex business was the dominant

player in the European derivatives market. Would the European

Competition Commission allow the number one player and the

number three to merge? Moreover, would DBAG have the stomach

for another fight, so soon after its last outing to London had failed?

Despite these concerns, it was speculated that DBAG could

nonetheless be tempted to enter into the bidding, at the very least to

drive up the price paid by the eventual winner and to gain

competitive information in the due diligence process.

Euronext’s Uphill Battle

Sitting back and sipping his drink, Barthez considered Euronext’s

likely role as underdog in the fight for LIFFE. Its likely rivals were

large, established and well positioned and he was highly uncertain

about the reception Euronext should expect in London, as an

upstart continental European company attempting to buy a flagship

British institution.

Barthez knew how coldly Deutsche Börse and OM Gruppen had

been received only a year earlier when they had tried to merge with

or acquire the LSE. He was only too aware that, even in 2001, British

and Americans viewed most continental European companies as

secretive, owned and controlled by complex structures of minority

interests, dominated by unions and restrictive laws, and subject to

interference from government at random. (In contrast, the so-called

“Anglo-American” approach to corporate governance was supposed

to be characterized by better transparency, liquidity, more liberal

takeover practices, deregulation and privatization.)

And if all that wasn’t bad enough, Théodore, Barthez and many

other key staff were French, and relations between the English and

the French nations had been rather uneasy (at best) for centuries

.

(see Exhibit 9). It didn’t take a vivid imagination to picture the

British tabloid headlines if the French were to march into the City

and snatch away a prized asset from under the noses of the

hometown favorite.

In other words, Barthez concluded, many factors, aside from price,

could be at play. As Patience Wheatcroft, the influential city editor

of The Times, argued:

Now that LIFFE has accepted that it must give up its

independence, it must be in the best interests of London’s

future as a financial centre that it should join forces with the

LSE rather than an overseas partner. This factor will not

influence the venture capitalists who are now keen to sell their

holding in LIFFE but it should play a part in the thinking of

the exchange’s other shareholders, who are also its

customers.19

Barthez’s Task

With all this in mind, Barthez turned his attention to the tough task

Théodore had commissioned him with: to figure out how to present

Euronext as a credible and serious combatant in the fight for LIFFE,

and to plan a successful campaign strategy. He began to scribble on his

cocktail napkin an outline of a memo for his boss on how Euronext

should position itself and the approach it should take with LIFFE...

Exhibit 1: A LIFFE trading pit, priorto conversion to electronic trading

Photograph: BBC News online

Image: EasyScreen

Source: ABN AMRO, press clippings

Exhibit 2: A LIFFE CONNECT electronic trading interface

Exhibit 3: LIFFE’s shareholders in the fall of 2001

Shareholders in LIFFE

Stake Note

Blackstone Group, US 29.3 These two venture capital companies can raise stake to

Battery Ventures, US as much as 40% through the 5m in warrants they have

FCT Europe 6.4 Futures trading firm

ICAP 4.5 Money broker

GH Financials 2.3 Clearing member

Carr Futures 1.5

JP Morgan 0.9

Kyte Group 0.9 Futures broking firm

Merrill Lynch 0.8

Goldman Sachs 0.7

Sucden 0.6

Total 48.2

.

Exhibit 4: Euronext segmental breakdown, year ended 2001

Source: Deutsche Bank estimates

Exhibit 5: Stock and derivatives exchanges in Europe in 2000.

Cash Derivitives Settlement Information Sales of OtherTrading Listing Trading Clearing & Custody Services Software Income

Segment Revenues 211.6 47.3 106.3 128.7 32.8 55.9 101.6 13.5

External Sales 177.4 49.7 84.3 172.8 33.3 64.3 101.6 14.6

EBIT 73.7 22 19.4 32.2 2.2 9.1 18.1 0

Margin 34.8% 46.5% 18.2% 25.0% 6.7% 16.3% 17.8% 0%

European Union countries which have adopted the Euro(European single currency)

European Union countries which have not adopted the Euro

• Exchanges

.

Exhibit 6: Potential savings from exchange integration

Source: Deutsche Börse annual report 2001 p21

Exhibit 7: Summary Euronext integration timetable as at August 2001

Source: Euronext Initial Public Offering Prospectus, June 2001

Additional costs of cross-border securities transactions per yearTotal volume €5 billion pa.

20%Affected by intermediaries andexchange organizations• Different market practices• Greater economies of scale

40%Hard to affect, only long-term changesconceivable• Smaller volumes (home bias)• Different languages and cultures

40%Affected by the EU and its membercountries• Different regulatory frameworks

and fiscal systems• Different corporate action rules• Different currencies

Cash eqiuities 2Q2001 3Q2001 4Q2001 1Q2002 2Q2002 3Q2002 4Q2002

NSC migration

Paris

Bruxelles

Amsterdam

Clearing

Paris

Bruxelles

Amsterdam

Settlement and custodyMise en place des liens entre less plates-formes de reglement-livraison

Derivatives Trading 2Q2001 3Q2001 4Q2001 1Q2002 2Q2002 3Q2002 4Q2002

Migrating Amsterdam option market from floor to electronic system

Upgrade NSC/VF

Integration of SWITCH in NSC hub

SWITCH integrates NSC/VO & BTS functions

Migrating Belgian and French option markets on SWITCH

Integration of SWITCH and NSC/VF anto NDS

Derivities Clearing

Clearing 21 Paris

Clearing 21 Bruxelles

Clearing 21 Amsterdam

.

Exhibit 8: Euronext’s organizational structure at the time of its IPO in July 2001

Supervisory Board

CEO (rotational, currentlyJean-Francios Theodore

George Möller(i/c derivatives)

CFOSerge Harry

Olivier Lefebre (i/c IT integration)

Euronext Amsterdam

Amsterdam Stock Exchange(main cash equities market)

Amsterdam DerivativesExchange (equity options)

Amsterdam CommoditiesExchange

Eerste markt(main cash equities market)

Tweede markt (2nd equities market)

Niuwe markt(small cap equities)

Belgian Trading Platform

Belfox(Belgian derivatives)

SBF-Bourse de Paris(main cash equities market)

Noveau Marche(for very small cap stocks)

MATIF(interest rate and

commodity derivatives)

MONEP(equity options and index

options and futures)

Euronext BrusselsEuronext Paris

Clearnet(clearing house)

Managing Board

Majority owned Minority stake

.

Exhibit 9: Illustrating the sometimes passionateanti-European feelings of many in Britain, thefront page headline in top-selling UK tabloid The Sun, 11/1/90:

Exhibit 10: Comparative corporate data for LIFFE and its bidders, 2001.

Sources: Deutsche Borse Annual Report 2001 (year ending Dec 31, 2001); Euronext unaudited pro formaconsolidated financial statements, 2001 (year ending Dec 31, 2001); London Stock Exchange annual report2002 (year ending March 31 2002); * LIFFE profit and loss statement year ending Dec 31 2000.£/Ä conversion rate = 1.62 (August 31, 2001).

LSE Deutsche Borse Euronext LIFFE*

Headquarters London Frankfurt Paris, Amsterdam, LondonBrussels

Volume of derivative - 674m 394m 216mcontracts traded (2001)

Annual revenues (2001) €315m €760.3m €697m €144m*

Annual EBITA (2001) €120.5m €278.1m €114.7m €11.0m*

Employees 550 1016 2012 n/a

Note: Jacques Delors, a French national, was thePresident of the European Commission between 1985and 1994, a period which saw the introduction of theEuropean Single Market and the creation of the ECU(European Currency Unit).

.

Euronext N.V. the Fight for LIFFE: “B”

What Happened?

On September 27, 2001, LIFFE (the London InternationalFinancial Futures and Options Exchange) confirmed that ithad appointed the investment bank Credit Suisse FirstBoston to advise the board on evaluating a “number ofapproaches” it had received.

There were immediately rumors in the media thatEuronext, Deutsche Börse (DBAG) and the London StockExchange (LSE) had all submitted bids: however, only theLSE confirmed it was a bidder.20 The LSE pushed for anearly opportunity to present its bid to the LIFFE board,which was reported as being £14.50 per share.21

Throughout the rest of the bidding process, DBAG andEuronext were virtually silent in public. At Barthez’srecommendation, Jean Théodore gave severalbackground briefings on Euronext’s history and corporatestrategy to banking correspondents in the British media,but would not discuss Euronext’s bid apart from toconfirm its interest in LIFFE. Euronext did not formallycontact politicians and regulators during the biddingprocess, preferring to target its campaign virtuallyexclusively towards the senior management and theshareholder-customers of LIFFE.

In contrast, the LSE conducted much of its campaign inthe public eye, seeking to win public and political supportto keep LIFFE in British hands.

All bidders made at least two presentations to the LIFFEboard, the final round of which took place on Thursday,October 25, 2001. Deutsche Börse was reportedly out ofthe running early, with an offer of just £17 per share.22

At Euronext’s presentation, CEO Jean François Théodoreunveiled a final offer of £18.25 (€29.83) per share in cash,valuing LIFFE at £555 million (€907 million). He also wasreported as having given a detailed description of thebenefits for LIFFE’s customers from the deal and the wayin which LIFFE would be incorporated into the Euronextgroup (including inviting Hugh Freedberg and Sir BrianWilliamson to remain in their roles as CEO and Chairmanof LIFFE); and offered to adopt CONNECT as thederivatives trading platform across the whole ofEuronext.23

The LSE, meanwhile, was reported as having made a finaloffer of £18.50 in cash and stock at its own finalpresentation. Having proposed that LIFFE switch to theLSE’s own trading system, SETS, in its first presentation,the LSE gave up this demand, along with its insistencethat LIFFE be fully integrated into the LSE and be run byLSE management. Following the final presentation, overthe weekend, the LSE went back to LIFFE and increasedits final offer to £19 per share.24

Meeting on Monday, October 28, the LIFFE board voted toreject the LSE’s offer, and instead to accept Euronext’s offerof £18.25 per share. The announcement was made onTuesday, October 29, 2001.

Euronext N.V.: the Fight for LIFFE “C”

Why LIFFE chose Euronext

The following is the transcript of an interview forCantos.com with LIFFE CEO Hugh Freedberg25 after theauction result was announced, in which he discusses whyLIFFE chose Euronext.

Q. Why did you accept a seemingly lower offer from Euronext?

Freedberg: We accepted an offer that was full value forLIFFE shareholders. It was an all-cash offer as opposed toan offer that represented a mix of cash and shares and inour view the all-cash offer was full value for ourshareholders combined with the fact that the other criteriathat we used to evaluate the offer was the business case.Euronext’s business case was compelling, it wasambitious, it was clear and we thought it was excellent forLIFFE’s shareholders and in particular for LIFFE’scustomers and staff.

Q. So what does Euronext bring to the party?

Freedberg: First of all it has a very big and successfulequity derivatives business, LIFFE has a very strong

interest rate derivatives business and those two togethergive us strong representation and a strong position in themarket in both segments. Euronext also will adopt LIFFE’stechnology, LIFFE CONNECT, across all of its derivativesmarkets which is a very important benefit for LIFFEindeed. Also, Euronext will enable us to offer clearingthrough London Clearing House which is the status quofor LIFFE customers and Clearnet, which is the status quofor Euronext customers. Hopefully over time this will beable to give customers greater choice when it comes toclearing.

Q. You’re the first major exchange to put itself up forsale, why’s that?

Freedberg: “We’ve put ourselves up for sale” is not quitethe right way of describing it. As people saw ourtechnology becoming more and more successful, beingglobally distributed, and they saw LIFFE resurrecting itselfand reinventing itself, we were approached by a numberof people who expressing interest in doing business withus in one way, shape or form. These discussions becamemore corporate in their nature as time went on, and wetook the view that we should have a formal process with aclear start and a clear end. Those people who wereinterested in putting a proposal to the board could do so,

.

and we would evaluate them against clear criteria. One ofthe most important factors was that we would look for fullvalue for shareholders and an organization who, if weteamed up with them, would allow us to go forward morequickly than if we stayed on our own as an independentorganization. That was what we chose to do. Had we notachieved those criteria in full, we could and would havestayed independent. In the event, Euronext came up withthe right proposal and we’re delighted to be able torecommend that to our shareholders.

Q. You talk about hope for efficiencies in the clearingsystem, but what do LIFFE’s customers get out ofthis deal?

Freedberg: LIFFE’s customers will be able to get moreproducts to trade, that’s of course very important. Traderslike to trade more products, they like deep pools ofliquidity, so that’s a benefit. And they will be able to do sothrough the same technology because Euronextexchanges will adopt LIFFE CONNECT for theirderivatives business, to give a single point of access intoall these products. Down the road we hope to be able to

get clearing efficiencies for our customers using ourexisting relationship with London Clearing House andClearnet, which is the clearing entity of Euronext. Thosetwo organizations will hopefully be able to work togetherand deliver more capital efficiencies to our customers.

Q. Has this deal, in a sense, dealt a blow to Londonas a leading financial centre?

Freedberg: I don’t think that’s the case at all. I think thatLondon benefits because LIFFE is a business based inLondon, and all of Euronext’s derivatives business will beunder the umbrella of LIFFE. LIFFE CONNECT is beingadopted as the technology. So from a London point ofview, more business comes through London as a result ofthis deal. LIFFE’s ownership has always beeninternational – some 70-odd percent of our ownership hasbeen international – so we have never been owned purelyby UK organizations or individuals. It benefits London inthe sense of more business, it builds a bridge into Europe,and makes LIFFE a more pan-European business. It’sexcellent for London.”

ENDNOTES

1. A derivative is a financial product whose value is derived from another financialproduct. For example, an equity option is a derivative, because its value depends onthe value of the underlying equity.

2. The UK Government had attempted to support the value of the British pound bylimiting the amount of foreign currency that UK individuals and corporationscould buy.

3. Johan van der Lugt and Marijin Smit, “Euronext Set to Launch Bid on LIFFE,” ABNAMRO, October 12, 2001.

4. Leader column “Settling Scores: Merging Stock Exchanges is Difficult,” TheEconomist, 356 (8189) September 20, 2000: 21-22.

5. Patrick Dixon, “The Final Bell Tolls for the National Stock Exchanges,” The Times,October 19, 1998. Available from Lexis-Nexis Academic http://web.lexis-nexis.com/universe/form/academic/s_guidednews.html (February 20, 2004).

6. An initial public offering or IPO (also known as a “flotation”) is when shares in acompany are made available for general purchase for the first time. The two mostcommon reasons for an IPO are 1) to raise money for the company to invest andgrow, and 2) to allow existing shareholders to valorize some or all of their stock.Once the IPO is complete, the company’s shares can be traded on an exchange.DBAG, Euronext and the LSE had all recently undertaken IPOs, although LIFFEremained an unlisted company.

7. Peter Lewis, “European Bourses are Unsustainable” (letter to the Editor), TheFinancial Times, June 1, 2001, London 1, 18.

8. Clearing is the process in which transactions, such as stock purchases, are thenvalidated, delivered and settled.

9. Christian Diebitsch, “Additional Financial Details on BVLP,” BNP Paribas EuropeanResearch Alert, December 21, 2001.

10. Terry Bond, “New voice for London Stock Exchange: We’re a crucial part of a hugeinvestment business so we must have a say in how our shares are being traded,” TheIndependent, July 28, 2001 1, Features, 3.

11. Gavin Casey, speaking at a joint London Stock Exchange/Deutsche Borse pressconference on July 7, 1998 quoted by Neil Behrmann in “London, Frankfurt in Dealto Create Single European Bourse,” Business Times (Singapore), July 8, 1998, 10.

12. London Stock Exchange and Deutsche Borse, joint press release, May 3, 2000.

13. Comment made during a wire service conference call on May 3, 2000, quoted byPhilip Pank, “London and Frankfurt stock exchanges merge to form IX<” Agence-France Press, May 3, 2000. Available from Lexis-Nexis Academic http://web.lexis-nexis.com/universe/form/academic/s_guidednews.html (January 5, 2004).

14. Cash equity exchanges derive a significant proportion of their income from the feescompanies pay to have their stocks listed on the exchange. In weak equity marketconditions, listing fee income suffers because there are fewer IPOs.

15. van der Lugt and Smit, “Euronext Set to Launch Bid on LIFFE.”

16. Vincent Boland, “Bid for LIFFE would be icing on the cake for the SE,” FinancialTimes, August 15, 2001, London Edition 1, Companies and Finance UK 18.

17. Deutsche Borse, 2001 annual report (Frankfurt: Deutsche Borse, 22002) 2http://deutsche-boerse.com/dbag/dispatch/en/binary/gdb_navigation/investor_relations/30_Reports_and_Figures/30_Anual_Reports/20_Archive/Content_Files/Archive/gdb_gesch_ftsbericht_2001_vollversion.pdf

18. Deutsche Borse, 2000 annual report, (Frankfurt: Deutsche Borse, 2001) 17http://deutsche-boerse.com/dbag/dispatch/en/binary/gdb_navigation/investor_relations/30_Reports_and_Figures/30_Anual_Reports/20_Archive/Content_Files//Archive/gdb_gesch_ftsbericht_2000_vollversion.pdf

19. Patience Wheatcroft, “Sir Brian Williamson,” The Times, September 29, 2001,Business 2.5.

20. London Stock Exchange press release, “Re: LIFFE (Holdings) PLC,” September 28,2001. Available on Lexis-Nexis Academic http://web.lexis-nexis.com/universe/form/academic/s_guidednews.html (January 10, 2005)

21. Charles Pretzlik, “LSE Set to Face Competition in Move for LIFFE,” Financial Times,October 13, 2001 London 2, Companies & Finance 14.

22. Chris Hughes, “LIFFE Rejects Stock Exchange Offer in Favour of Euronext,” TheIndependent, October 30, 2001, Business 16.

23. Ibid.

24. Ibid.

25. Hugh Freedberg, video interview with Cantos.com. London., October 29, 2001.Reproduced with kind permission from Cantos.com.

.

Jennifer E. Bailey, Cameron A. McHale, Shannon J. RainerJames S. O’Rourke, faculty adviser

Mendoza College of BusinessUniversity of Notre Dame

Starbucks Corporation:Can Customers Breastfeed in a Coffee Shop?

Audrey Lincoff sat back in her office chair, looking at the numerous

newspaper articles that covered her desk. As the spokeswoman for

Starbucks, she knew she played a major role in Starbucks response to

the current dilemma. The question was all over the news and the

office: How would Starbucks handle the pressure from a new activist

group, breastfeeding mothers? Led by a powerful woman and skilled

negotiator, the disgruntled breastfeeders had gathered at a Maryland

Starbucks to stage a “nurse-in.” Ms. Lincoff worried about the

media attention and had to make a decision: Cater to the group’s

demands or ignore them in hopes that they would either fade away

or choose another target.

History of Starbucks Coffee Company

Starbucks began as a coffee importing and roasting company in

1971. The Seattle-based corporation was named after the first mate

in Herman Melville’s classic novel, Moby Dick. The name reflected

the quirky nature of the company’s founders, Gerald Baldwin,

Gordon Bowker, and Zev Siegl, who had become friends during

their college days at the University of Seattle.1

The Starbucks Coffee, Tea, and Spice company sold roasted coffee

beans to restaurants and to the public from its store in the Pike Place

Market next to Puget Sound. Starbucks had grown to four stores by

1982, the year their Hammerplast sales rep decided to pay them a

visit. Howard Schultz was selling a lot of coffee percolators to the

little company in Seattle; he flew out from New York City to see why.

He fell in love with the company, and pushed the founders to create

the job of director of retail sales for him.

The next year, Schultz spent his vacation in Milan. He experienced

Italian café culture and realized America had nothing like it. More

importantly, he decided America was ready for such a “third place,” a

location outside of the home and the office for people to gather.

However, his employers did not share his vision. Schultz left to

follow his dream, starting the Il Giornale chain of cafés in the Seattle

area in 1985.

Two years later, Starbucks’ owners decided they were ready to leave

the coffee business. Schultz put together a group of investors,

including Bill Gates, Sr., and bought the company. He re-branded

the Il Giornale stores as Starbucks and didn’t look back. It took him

five years to prepare the company for a public offering, but by 2004,

SBUX was number eight on Fortune magazine’s list of “America’s

Most Admired Companies.”

Since 1987, the company has expanded at an astonishing rate.

Schultz’s hunch was right: America was ready for the third place

provided by Starbucks. In 1987, Starbucks opened its first store

outside of the State of Washington. Over the next eight years, the

company spread throughout North America before opening its first

overseas location in Japan. The company continues to open new

stores at an impressive rate. Fifteen hundred new stores have been

planned for 2006. Starbucks has also grown through licensing

relationships and by offering bottled drinks and bags of coffee for

sale in grocery stores. Retail sales for 2003 were $3.45 million.2

Corporate Culture

Starbucks’ unique culture was what led Howard Schultz to leave his

successful appliance sales career and move his family from one coast

of the country to the other. As it has grown, the leadership has been

careful to maintain and grow the company’s culture. As Schultz has

said, “Building Starbucks has been very much about building the

company my father never got a chance to work for.”3

All Starbucks’ employees who work more than 20 hours per week

are eligible for benefits. The company also works with the farmers

who grow the coffee beans to improve their lives, as coffee growing

regions tend to be very poor and the cost of coffee has been

depressed because of oversupply.4 Starbucks’ baristas tend to be

proud of both the company they work for and the training they

receive. Upper management is more diverse than most large

companies in the United States.5 All of this has built the company’s

reputation for being progressive, even liberal, for a large

corporation.

.

Training

Barista training involves 20 hours of on-line and in-store on-the-job

training. Many of the stores have wireless Internet routers. While

the wi-fi connection is a great draw for customers, it also

complements the company’s training program. After entry-level

training, advanced programs are also available on-line, including the

recently introduced “black apron” training for baristas to achieve

Coffee Master status.6

The management training program involves another 10 weeks.7

Starbucks knows that an important part of developing superior

managers is making sure the right people go through the training

program. Training for store development managers is conducted at

headquarters in Seattle after the managers have worked for at least

three months in a store.8

Customers

While employees clearly come first in the Starbucks culture, the

customer is a close second. Starbucks’ fourth guiding principle is to

“Develop enthusiastically satisfied customers all the time.” “We

recognized early on that the equity of the Starbucks brand was going

to be the retail experience that the customers had in our stores,” says

Schultz.9

As an industry analyst recently noted, “The two things that make

them great are real estate and making sure no one has a bad

experience in their stores.” Schultz says this is because “our

customers see themselves inside our company, inside our brand –

because they’re part of the Starbucks experience.”10

The Breastfeeding Protest: Got Milk?

On August 8, 2004 a new item was added to a Maryland Starbucks

menu, but for a much younger crowd. About 100 people, including

babies, the babies’ mothers and fathers, grandmothers and friends,

filed into a Silver Springs, MD Starbucks coffee shop to stage a

“nurse-in.” Holding signs, feeding babies, and passing out fliers on

the benefits of breastfeeding, the mothers were focused.

The idea of the “nurse-in” began a month earlier, after a Starbucks’

employee received several complaints and asked Lorig Charkoudian

to relocate to the bathroom or cover up as she breastfed her 15-

month-old daughter in the Maryland coffee shop. Inspired by the

incident, Lorig gathered about 30 mothers to breastfeed at the store

and protest actions that they felt belittled the importance of

breastfeeding, which they saw as a natural, healthy process. Lorig

argued that covering is uncomfortable for the baby and that

breastfeeding shows, in her words, “fewer breasts than the average

beer ad.”11

By 2005, Starbucks did not have an official policy regarding

breastfeeding in its coffee shops. In Lorig’s case, the law was on her

side. In Maryland, an act passed in 2003 prohibits stopping mothers

from breastfeeding in public. Starbucks spokeswoman Audrey

Lincoff responded by stating that “Starbucks complies with all

applicable state and local laws regarding breastfeeding” and that

Starbucks would “instruct our Maryland store partners to inform

any concerned customer that by Maryland law, mothers have their

right to breastfeed in public and to suggest to the customer that they

either avert their eyes or move to a different location within the

store.”12

Unfortunately for Starbucks, Lorig was not satisfied with this effort.

She wanted Starbucks to allow breastfeeding in all of its 5,882

United States shops. To support her efforts, Lorig started a website,

http://www.nurseatstarbucks.comhttp://www., to allow mothers to

send letters to Starbucks chief executive, Orin C. Smith.13 “It’s all

about public acceptance of breastfeeding,” said Lorig.14 Supporting

mothers seemed to agree with the decision to use Starbucks for their

demonstrations. One participating “nurse-in” mother responded by

saying, “If you look at the clientele during business hours, you’ll find

a lot of young mothers with children who come to congregate and

talk. If they want to continue to attract this clientele, they need to

change their policies.”15 On the other hand, a regular, loyal

customer inside the shop at the time of the demonstration

responded by stating that Lori’s decision was an “overreaction” and

that in a place where he is eating or drinking, a “nurse-in” was the

last thing he wanted to see.16

The Leader of the Pack

Lorig Charkoudian is no stranger to public confrontation and

conflict. From the death penalty to elephant rights, she has been

involved in a number of causes and movements. Recently voted one

of “Maryland’s Top 100 Women,” Charkoudian has a history of

public confrontation and public demonstrations.

From 1995 to 2005, Charkoudian served as the founder and

executive director of the Community Mediation Program (CMP) in

Baltimore. The CMP was established initially to help Baltimore

residents resolve conflicts non-violently, but developed into a much

larger program spanning the State of Maryland. She is also

employed as an adjunct professor in the University of Baltimore’s

Negotiation and Conflict Management Program. Charkoudian is

the recipient of numerous of local awards in the Baltimore area,

including the Unsung Hero Award (1999), the Brick Award (1997),

and the Human Rights Community Builder (1997).17 Thus, it

would appear the breastfeeding conflict at Starbucks is not the

product of amateur activists; it is led by an experienced professional

who knows how to lead and convince others to follow.

.

Past Problems

The breastfeeding issue is not the first to involve conflict and

controversy in a Starbucks store. In 1995, Starbucks’ Corporate

Customer Relations Manager Betsy Reese became aware of several

problems associated with an espresso machine purchased by a

customer named Jeremy Dorosin. In just six weeks, the problem had

escalated to a point unforeseen by any Starbucks executive.

In April of 1995, Mr. Dorosin purchased an espresso machine from a

California Starbucks, which left him unsatisfied because of defects.

Upon returning the machine for repair, Dorosin received a “loaner”

from the company. Apparently pleased with the performance of the

machine he’d been loaned, Dorosin purchased another as a wedding

gift for a friend. Unfortunately, his friend found the gift to be in

unacceptable condition – dirty, wet, and not functioning properly –

as if it had been previously used. Embarrassed, Dorosin returned

the wedding gift to the Starbucks store and complained to the

manager. After several interactions with the manager, the corporate

service supervisor, and the district manager, no resolution could be

reached. Even when Starbucks offered apologies and gifts, Dorosin

responded with “too little, too late.” In response, he chose to take the

disagreement public and confront the company in the media.18

Jeremy Dorosin ran an advertisement in the Wall Street Journal on

May 5, 1995, describing what had happened to him and asking if

other people had similar or comparable bad experiences with

Starbucks. In response, he received thousands of calls from angry

customers, competitors and employees. Although Starbucks and

Dorosin’s stories differ concerning exactly when the company

offered to apologize, one thing is crystal clear: the short timeline

between problem and escalation. Between the first advertisement on

May 5, 1995 until mid-June of that year, Dorosin received non-stop

attention in four Wall Street Journal articles, three radio shows, three

television program appearances, and one New York Times article.

He even launched a website entitled, http://www.starbucked.com.19

Dorosin’s name serves today as a reminder to Starbucks of how

small problems can escalate out of control.

Breastfeeding Legislation

On May 22, 2003, Maryland Gov. Robert L. Ehrlich, Jr. signed

legislation regarding breastfeeding in public. The State of Maryland

Code, Title XX, Subtitle XIII states that:

• A mother may breastfeed her child in any public or private

location in which the mother and child are authorized to be.

• A person may not restrict or limit the right of a mother to breast-

feed her child.20

This law gives a mother the right to breastfeed her child virtually

anywhere in the State of Maryland, but does not clarify whether or

not an individual has the right to request that a mother cover her

nipple during breast feeding.

Maryland was not the first to enact legislation specifically governing

breastfeeding in public places. In fact, close examination of other

state laws regarding breastfeeding reveals the complexity of the

situation. By 2005, 16 U.S. states had no legislation exempting

breastfeeding from indecent exposure laws. This leaves mothers

who breastfeed in public at risk of violating a criminal statute.

Some states, such as Missouri, give mothers the right to breastfeed in

public, but with as much discretion as possible. Georgia laws

previously incorporated similar language, until 2002 when it was

removed. Conversely, nine states have legislation stating, “a mother

may breastfeed her baby in any location, public or private, where the

mother is otherwise authorized to be, irrespective of whether or not

the nipple of the mother’s breast is covered during or incidental to

the breastfeeding.” New Jersey and Connecticut state laws impose a

fine and even potential imprisonment for persons discriminating

against breastfeeding mothers. State law in Hawaii and Illinois give

breastfeeding mothers the right to bring proceedings against any

person engaging in a discriminatory practice. Connecticut, Hawaii

and Louisiana refer to the restriction of the right of a mother to

breastfeed her child as a discriminatory practice.21

Not only do numerous state laws address public breastfeeding, but

many states have enacted legislation regarding breastfeeding in the

workplace, deferral of jury duty, and the exemption of sales and use

tax on breastfeeding-related items. Coincidently, Maryland was the

first state to exempt breastfeeding supplies from sales tax.

Considering that 34 states have some form of legislation regarding

public breastfeeding, it was becoming obvious to Starbucks

management that breastfeeding mothers had become a powerful

special interest group.

Breastfeeding Everywhere

Starbucks is not the only organization attempting to assess the

impact that a breastfeeding policy (or lack thereof) might have on

company performance. McDonald’s experienced a similar incident

as women across the country protested at local fast food restaurants

in support of Jamie Lovett. Ms. Lovett was asked to stop nursing her

9-month-old at a McDonald’s in Birmingham, AL on June 27, 2004.

The McDonald’s manager referred questions to marketing

representative Stacy Cox who could not be reached for comment.22

Burger King also experienced a similar incident at a franchise in Salt

Lake City. Burger King implemented a policy that allows

breastfeeding in its restaurants the night before a scheduled protest.

A spokesman for Burger King responded to the incident by saying,

“We want to be a family-friendly place.” The new policy requires

Burger King employees to ask complaining customers to move to a

different area of the restaurant. While Burger King’s public apology

and policy implementation satisfied the Utah woman, the same

cannot be said for all breastfeeding advocates. Some women assert

that a policy allowing breastfeeding is not enough. Advocates want

.

restaurants claiming to be “family friendly” to provide a special

room where mothers can breastfeed their children.23

The array of responses from breastfeeding advocates makes it clear

that satisfying all of their needs will be very difficult for any

company. Any organization that succumbs to the demands of one

breastfeeding mother will open itself up to even more demands.

Organizations must decide how far is too far and address this issue

before it becomes a major crisis.

Going Forward

Ms. Lincoff swept the clippings into a folder to take to the

communications strategy meeting. She wondered what shape the

final plan would take. Even a small incident could damage the

brand if it were mishandled. As she headed down the hall, she

thought about the conflicting goals of the stakeholders and possible

ways to satisfy them. With growth and success in the marketplace

come challenges and opportunities of many sorts; breastfeeding

mothers and their babies appeared to be next.

Discussion Questions

1. Should Lorig’s group’s demands be taken seriously, or are they

just another case of ridiculous requests which can be safely

ignored by the company?

2. Is there a reasonable way for Starbucks to satisfy all customer

segments?

3. Assuming Starbucks adopts an official policy, how can it

effectively communicate the policy throughout the company?

4. When state laws which affect store operations change, how can

Starbucks communicate the new laws to stores in that state to

ensure that all stores are in compliance?

Writing Assignment

Please respond in writing to the issues presented in this case by

preparing two documents: a communication strategy memo and a

professional business letter.

In preparing these documents, you may assume one of two roles:

you may identify yourself as an external communication consultant

who has been asked to provide Ms. Lincoff with advice, or you may

identify yourself as a communication manager within Starbucks

Corporation. Either way, you must prepare a strategy memo

addressed to Ms. Audrey Lincoff, vice president for corporate

communication.

Your strategy memo should provide analysis of the business

problem, the relevant background details, critical issues, audience

factors, options for action, and your specific recommendations.

Think broadly and provide comprehensive advice for Ms. Lincoff

regarding the issue of customers breastfeeding in Starbucks stores.

You must also prepare a professional business letter for Howard

Schultz’s signature. That document should be directed to Starbucks

customers and should explain the company’s policy and the reasons

why the company has adopted that policy. If you have questions

about either of these documents, please consult your instructor.

ENDNOTES

1. Serwer, A. “Hot Starbucks to Go,” Fortune, January 26, 2004, 60.

2. Starbucks corporate Web site: http://www.starbucks.com. Retrieved December 23,2004, 1:54 p.m. EST.

3. O’Connell, P. “A Full-Bodied Talk with Mr. Starbucks,” BusinessWeek, October 15,2004. Retrieved from http://yahoo.businessweek.com.

4. Stopper, W. “Establishing and Maintaining the Trust of Your Employees,” HumanResource Planning, June 21, 2004.

5. Fellner, K. “The Starbucks Paradox,” ColorLines, Spring 2004. Available fromhttp://www.arc.org.

6. Wolff, L. “Coffee Chains Perk Up Training, Store Design,” Gourmet News, May 1,2004.

7. Coeyman, M. “Loving the Daily Grind,” Restaurant Business, October 10, 1996, 82.

8. H.D. “Boot Camp Brewhaha,” Training, July 17, 2004.

9. Dann, Schulz, Somberg and Levitan. “How to...Find a Hit as Big as Starbucks,”Business 2.0, May 2004, 66.

10. Smith, S. “Experiencing the Brand – Branding the Experience,” February 2001.Available from http://www.personaglobal.com

11. Helderman, R. “Maryland Moms Say No to Coverup at Starbucks,” Washington Post,August 9, 2004. Available from http://www.washingtonpost.com/ac2/wp-dyn/A50610.

12. Mothers Stage ‘Nurse-in’ at Starbucks Store,” MSNBC, August 10, 2004. Availablefrom http://www.msnbc.msn.com/id/5662809.

13. Ibid.

14. Charkoudian, L. Resume. Maryland Daily Record, October 26, 2004. Available fromhttp://www.mddailyrecord.com/top100w/01charkoudian.html.

15. Helderman, R. Washington Post, August 9, 2004.

16. Ibid.

17. Charkoudian, L. Maryland Daily Record, October 26, 2004.

18. Rosenthal, D.; Barr, T.; and Boyd, T. “Dorosin v. Starbucks,” Cast Research Journal,1998. Retrieved October 2, 2004 from http://www.starbucked.com.

19. Ibid.

20. “Maryland Code 220-81, S.B. 223, Chap. 369,” Maryland General Assembly HomePage, May 22, 2003. Available fromhttp://mlis.state.md.us/2003rs/chapters/Ch_369_SB0223T.rtf.

21. Vance, M. “A Current Summary of Breastfeeding Legislation in the U.S.,”La Leche League International, September 21, 2004. Available fromhttp://lalecheleague.org/Law/summary.html.

22. Daley, J. “Local Breastfeeding Advocate to Join Nationwide Protest,:The Marion Star, August 7, 2004. Available fromhttp://www.marionstar.com/news/stories/20040807/localnews.

23. “Breastfeeding OK at Burger King.” Online posting. A Sassy Lawyer in PhilippineSuburbia, November 25, 2003. Available from http://journal.houseonahill.net.

.

April MollerbergFaculty Adviser: Dr. Anne Grinols

Hankamer School of BusinessBaylor University

United States Postal Service:Lessons in Crisis Communication

Introduction

Annette Davidson shuffled her papers into a manila folder, grabbed

her coffee, and checked her watch. It was 7:15 a.m. and time for her

meeting with the senior management at the United States Postal

Service. Annette worked for a large business communication

consulting company that specialized in executive management

communication services. Today’s meeting with the Postmaster

General and members of the Board of Governors would be the

fourth this week and today was only Wednesday. Things had really

kicked into high gear since the anthrax had been detected in the mail

system last week and Annette was called in to assist the Postal Service

management team in dealing with the continually evolving crisis.

As Annette walked briskly towards the conference room, she

reviewed the agenda in her mind. She entered the room and found

an empty seat as Wade Holmes stepped up to the podium to make

the morning announcements. “This morning,” Wade started, “I

want to begin with new updates on the symptoms of anthrax

infection, information on a possible new case of inhalation anthrax

infection in New York, and where we currently stand on the

identification of a suspect(s).”

Annette sighed; this was definitely going to be another long day.*

HISTORY

In the more than two centuries since the United States Postal Service

began, it has grown and changed with America. Discovering the

history of the Postal Service is a journey into the history of

transportation, economics, industrialization, communications and

government. The USPS represents an industry that drives American

commerce; and still provides universal service for every family in

the nation.

Since its crude beginnings in 1639, the Postal Service has had a

colorful history. When Benjamin Franklin was appointed the first

Postmaster General in 1753, there were only a handful of post

offices. Today, with over 38,000 post offices, 800,000 employees, and

a yearly budget of more than $35 million, the USPS has become one

of the world’s largest organizations.

The internal organizational structure of the Postal Service has also

changed over the years. Early on, the Postmaster General was

appointed by the President. The Post Office Department was

transformed into the United States Postal Service, an independent

establishment of the executive branch of the Government of the

United States, on July 1, 1971, when the Postmaster General ceased

to be a member of the President’s cabinet. The Board of Governors

was established by the Postal Reorganization Act and includes nine

Governors who are appointed by the President with the advice and

consent of the Senate. The nine Governors select a Postmaster

General, who becomes a member of the Board, and those 10 select a

Deputy Postmaster General, who also serves on the Board.

The mission of the Postal Service, as stated in Title 39 of the U.S.

Code, is: The Postal Service shall have as its basic function the

obligation to provide postal services to bind the nation together

through the personal, educational, literary, and business

correspondence of the people. It shall provide prompt, reliable, and

efficient services to patrons in all areas and shall render postal

services to all communities. 1

October 2001

On September 11, 2001, terrorists attacked the United States, killing

thousands. The Postal Service helped keep the lines of communi-

scation open despite severe restrictions on commercial air

operations during this tragic time.

In the days, weeks, and months following the September 11th

attacks in New York and Washington D.C., there was an intense

climate of uneasiness and panic in America. American citizens were

consumed with grief over the unprecedented tragedy and were

wondering what might happen next. In October 2001, barely three

weeks after the attacks, another wave of terror spread throughout

the country. (Figure 1).

*Introduction scenario not based on any actual events.

.

Anthrax is a rare, infectious disease caused by bacteria and is usually

spread in the form of a spore. There are three forms of anthrax

infection: cutaneous (skin), inhalation (lungs), and gastrointestinal

(stomach and intestine). Anthrax infection can cause boils, sores,

fever, fatigue, difficulty breathing, and even death. Most persons who

are exposed to anthrax become ill within one week of exposure.2

On October 5, 2001, a photo editor in Florida died from inhalation

anthrax. A week later, a media employee in New York City was

diagnosed with cutaneous anthrax after opening a letter addressed

to an NBC anchorman. On October 15, a letter containing anthrax

was delivered to the Capitol Hill office of a U.S. Senator. On

October 21, an employee at a postal facility in Washington D.C. who

handled mail for Capitol Hill, was diagnosed with inhalation

anthrax and died the next day. That night, an employee from the

same facility died from inhalation anthrax. By October 27, anthrax

spores had been detected in other locations. In the following weeks,

business and government offices closed and the country went on

high alert.3

Impact On USPS

Crises have many different sources. Crisis, whether the result of a

natural disaster (earthquakes, fire, storms, etc) or man-made (such

as vandalism, acts of terror, etc.), big or small, short term or long

term, is an inevitable occurrence for all organizations.

The anthrax attacks of October 2001 thrust the United States Postal

Service into the media spotlight and onto the stage of public

scrutiny. The entire nation watched to see how the U.S. government

and the Postal Service would respond to this newest act of terror.

Indeed, never before in the history of the Postal Service had a crisis

of this magnitude occurred.

Man-made Crisis

The Postal Service faced a very serious man-made crisis. Although it

was ultimately determined that the USPS was not the intended

target, terrorists were, nonetheless, using the mail system as a vehicle

to perpetuate terror through the spread of a rare biological agent.

Little was known about anthrax as there had been no previous cases

of its use as a biological weapon against Americans.

Communication Scope during Crisis

The message itself was particularly challenging to communicate due

to the technical nature of the issue. Because anthrax – its method of

spread, its symptoms, prevention, and treatment – was

predominantly medical in nature, the Postal Service was

disadvantaged in that the agency was ill-equipped to understand and

communicate the dangers of anthrax. Additionally, the task of

disseminating this message to all Americans was enormous.

Communicating the message to business partners as well as to all

800,000 Postal Service employees also presented Postal Service

management with a mammoth task of tailoring the message to each

specific stakeholder group and spreading the message through the

most effective channels.

USPS Responds

The Postal Service wasted little time in responding to the threat of

the anthrax attacks. Within a matter of hours after the CDC

confirmed that a letter carrier had cutaneous anthrax, the Postal

Service closed the Trenton and Brentwood postal facilities. The

USPS began working diligently with government and medical

agencies to determine the nature and the extent of the danger

involved. The Postmaster General announced that the Postal

Inspection Service was working with other law enforcement agencies

on the incident in Florida. Two days after the announcement, the

USPS began to educate employees nationwide on signs of anthrax

exposure and procedures for handling mail to avoid anthrax

infection. A week later, the agency began mailing out informational

postcards to all American households (Exhibits 2 and 3) to educate

the public on the signs and dangers of anthrax. Press releases issued,

public appearances made, a special Mail Security Task Force created,

a $1 million reward offered and extensive collaboration between the

USPS and various government and media agencies were just a few of

the many initial steps taken by the Postal Agency.

The 2004 GAO report gave the following account to Congress:

“While noting that Postal Service officials could have taken other

actions to respond to the anthrax incidents, postal union leaders

nevertheless praised the Postal Service for its efforts to provide a safe

work environment and to prevent future occurrences, as well as to

involve them in the response and to keep employees informed. For

example, in testimony delivered to the House Committee on

Government Reform on October 30, 2001, two union leaders

stressed that the Postal Service had acted in good faith and that its

decisions were guided by the advice and recommendations it

received from the medical community.”3

GAO Response

The Government Accountability Office – the audit, evaluation, and

investigative arm of Congress – exists to support Congress in

meeting its constitutional responsibilities and to help improve the

performance and accountability of the federal government for the

American people.

In September 2004, the GAO released publication # GAO-04-239,

which analyzed, critiqued and reported on the USPS response to the

2001 anthrax attacks. In the report, the GAO made the following

observations:

.

“The Postal Service communicated information to affected postal

employees about the health risks posed by, and the extent of, anthrax

contamination at the five facilities in our review, but problems with

the accuracy, clarity, and timeliness of the information provided led

employees to question the information they received. Problems with

accuracy occurred because the early health risk information public

health officials provided was based on their existing knowledge and

experience that proved to be far more uncertain than the officials

initially recognized and which resulted in underestimating the health

risks to postal employees. Problems with clarity occurred because

information on the medical response to anthrax contamination

changed as knowledge evolved. Problems with timeliness occurred

when the Postal Service delayed the release of quantitative data

(anthrax spore counts) from environmental tests at one of the five

facilities. A union representative had requested this information, and

the Postal Service was required to disclose it, but the Postal Service

delayed disclosure in part because it was uncertain what the results

meant for worker safety and public health. The Postal Service has

taken steps aimed at communicating more effectively, including

establishing a center to coordinate information within the postal

system and working with other agencies to develop guidelines for

responding to anthrax.”3

Although some preliminary problems were identified by the GAO

report, the overall conclusion of the committee was that USPS

handled the situation well, given the circumstances. The report also

affirmed the USPS commitment to further improve its internal

communication process.

A Matter of Social Responsibility

The Postal Service understood that a polished message alone could

not protect the organization’s reputation. For USPS to excel, it must

follow the message with concrete action. Since the anthrax

incidents, the Postal Service has twice revised its Interim Guidelines

to incorporate the lessons it has learned from their response to

anthrax in its facilities.

Recognizing the need to improve its communication both internally

and externally, the USPS took a number of steps aimed at

communicating more effectively during the fall of 2001. First, on

October 16, 2001, it established a National Postal Operations Center

to coordinate information within the postal system. It also created a

Mail Security Task Force composed of representatives from

management associations and employee unions. To improve its

communications with other agencies, on October 31, 2001, the

USPS established a Unified Incident Command Center with

representatives from the agencies that respond to contamination in

postal facilities. The USPS also worked with the National Response

Team – a group of 16 federal agencies responsible for planning,

preparing, and responding to the release of hazardous substances –

to revise existing guidelines for responding to anthrax. Consistent

with GAO recommendations, the most recent version of the

guidelines, suggests that agencies (1) disclose more – rather than less

– information, particularly when the release of undisclosed

information could damage an agency’s credibility; (2) consider the

needs of different audiences (e.g., employees, reporters, local

politicians) for different types of information; (3) anticipate what

information people need and in what form; and (4) admit when you

do not know the information. The USPS also revised its guidance to

require that facility managers communicate future test results —

including quantitative results — to employees and others as quickly

as possible, along with information explaining any limitations or

uncertainties associated with the results.3

Looking Forward

In addition to adopting new technology to help detect and prevent

anthrax from moving through the mail system, the Postal Service

has also improved its ability to share information.

During the anthrax response, the USPS learned more about the roles

and responsibilities of key federal agencies and personnel. Postal

managers now interact regularly with federal agencies, including

OSHA and the EPA. In addition, postal managers meet periodically

with representatives of the 16 federal agencies that make up the

National Response Team. Such regular interaction has established a

basis for better coordination with federal agencies than the USPS

had prior to the anthrax incidents. Internally, the USPS has

centralized responsibility for any future response. The agency has

created a new position; the vice president for emergency

preparedness, to identify a single decision maker and to ensure that

one individual will be involved in all phases of planning for and

responding to any future emergency. This new position signifies the

importance of having communication as a core function of

executive management. Additionally, the Postal Service has

established a 24-hour watch desk so that when an incident occurs, a

call goes directly to the desk and the Inspection Service can transmit

information nationwide. The USPS can then see, track, and analyze

patterns as they develop, whereas in the past such information was

not available until after a report on the incident had been prepared.

Having earlier information on the response also allows the

Inspection Service to meet sooner with the Department of

Homeland Security to discuss the issues. Finally, the USPS has

established procedures for obtaining up-to-date information for

contacting employees. For example, the employees are required to

provide current information before their ID badges are issued. In

addition, the plant orientation brochure and orientation briefing

address the importance of keeping the information up to date. The

USPS also posts periodic reminders and locates a kiosk within the

workspace to make it easier for employees to update their contact

information.

.

Questions

1. Imagine yourself as an executive in a strategy planning session at

USPS headquarters. Who should be present at the planning

session? Describe the conversation that might occur.

2. What are the appropriate steps an organization should take to

handle a crisis situation? At what point should communication

occur with employees, media, and outside stakeholders?

3. Would you consider the communication strategy of USPS a

success? Why or why not?

4. What made the USPS corporate communication strategy

effective/ineffective?

5. What follow-up actions did USPS take that were imperative

to success?

6. What are the long-term benefits to be gained from effective

corporate communication?

7. Suppose that a suspect/perpetrator is identified during Wade’s

morning announcements. Should this information be

communicated to the public? What if the perpetrator is an

employee or relative of an employee of either the Postal Service

or a high ranking government official – does this affect the

public’s right to know?

8. What if a suspect is never identified? How can USPS promote

confidence in the agency?

ENDNOTES

1. www.usps.gov

2. CDC Emergency Preparedness website.http://www.bt.cdc.gov/agent/anthrax/needtoknow.asp

3. 2004 GAO Report. www.gao.gov

Source: GAO analysis of CDC documentaion.Note: The date reflects when CDC either (1) confirmed a case of anthraxor (2) suspected a case of anthrax that could not be confirmed.

Figure 1: Date (2001), Type and Location of Anthrax Cases

.

Source: GAO based on information provided by the U.S. Postal Services, the CDC, the Connecticut Department of PublicHealth,the D.C. Department of Health, the FBI, the Florida Department of Public Health, the New Jersey Department ofPublic Health and Senior Services, and the New York City Department of Public Health and Mental Hygiene.

Exhibit 1: Time Line of Key Events, Fall 2001

Table 2: Distribution of Anthrax Cases, Fall 2001 Type of anthrax and affected population

Cutaneous Inhalation

Number of confirmedFacility location or suspected cases Postal employees Others Postal employees Others

Florida 2 0 0 0 2

New York 8 0 7 0 1

New Jersey 6 3 1 2 0

Washington, D.C. 5 0 0 4 1

Connecticut 1 0 0 0 1

Total 22 3 8 6 5

Source: GAO analysis of CDC information.

.

TIMELINE continued next page

.

Exhibit 2: Example of Informational Postcard Exhibit 3: Example of Informational Postcard (Spanish)

Text of Postcard:

A MESSAGE FROM THE POSTMASTER GENERAL

The U. S. Postal Service places the highest priority on the safety of our customers and employees and on the security of the mail.

Please see the other side of this card for information aboutsafety and mail handling. We want you to know we are doingeverything possible to make sure the mail is safe, and we needyour help. Your security and peace of mind are paramount to us.

John E. Potter

Source: http://www.usps.gov Source: http://www.usps.gov

Time Line of Key Events, Fall 2001 continued from previous page

.

Exhibit 4: Press Release October 12, 2001

Exhibit 5: Press Release October 15, 2001

USPS News

FOR IMMEDIATE RELEASEOctober 12, 2001Release No. 01-088

POSTAL SERVICE REDOUBLES EFFORTS TOMAINTAIN SAFE AND SECURE MAIL SERVICE

WASHINGTON — The U. S. Postal Service today issuedguidance to customers and employees concerned withthe security of the U.S. Mail.

“We are taking every reasonable measure to assure thesafety of our employees and customers,” said John E.Potter, Postmaster General.

The Postal Service conducts recurrent and routinelearning programs for its employees on safe and securemail handling, transportation and delivery procedures.

“We will continue to work with our employees and the

public to re-emphasize safe handling procedures forhazardous materials,” continued the Postmaster General.

To allay fear of the unknown, a fact list with questions andanswers about hazardous materials and specificallyanthrax is attached. Additionally, the public can get furtherinformation at www.usps.com. Customers who haveconcerns about specific suspicious items of mail shouldcontact local law enforcement agencies. The PostalService is coordinating its efforts with the FBI, PostalInspection Service and the Department of Health andHuman Services.

“We understand the importance of America’s mail to itspeople and the economy and we will continue to deliverour promise of safe and secure mail services,” concludedPotter. “As always the security and safety of the mail is ofthe utmost importance and we will continue to prosecutethose who violate these principles to the fullest extent ofthe law.”

USPS News: Press Releases

FOR IMMEDIATE RELEASEOctober 15, 2001Release No. 01-089

POSTMASTER GENERAL ANNOUNCES MAIL SECURITY TASK FORCE

DENVER, CO — Postmaster General John (Jack) E. Pottertoday assured the American public that the U.S. PostalService and the mailing industry are doing everything withintheir power to ensure the integrity of what’s in the mail.

Speaking here to an audience of more than 2,000 mailersattending National Postal Forum, Potter emphasized thatthe Postal Service has mobilized its resources to meet thechallenges and announced the formation of a task force toreview every plan and approach it has regarding mailsecurity and the handling of hazardous materials in the mail.

“None of us could have anticipated the events of the lastweek — and how someone or some group would targetthe mail for such evil purposes,” said Potter.

But... “make no mistake, we cannot sit back and allow ournation’s confidence in the mail to erode,” he said, addingthat federal law enforcement officers from the PostalInspection Service to the FBI will bring to justice whoeveror whatever group is behind this malicious, evil activity.

The task force announced by Potter will be led by ChiefPostal Inspector Kenneth Weaver. Weaver will be joinedby representatives from postal unions, managementassociations, and the Office of the Inspector General,

along with safety and medical specialists and members ofthe mailing industry.

The problem of contaminated mail does not belong solelyto the Postal Service, said Potter. It is a concern formailers and shippers nationwide. And, while the level ofrisk is relatively small, it is a problem that compelseveryone in the nation to be vigilant.

“If we in the mailing industry can spend time noweducating and bringing a commonsense perspective towhat’s happening, we will provide a valuable service tothe nation, our customers, our employees, and the U.S.Mail,” he said.

What should people do if they receive something in themail that seems out of the ordinary or raises suspicion?

“Don’t open it. Don’t shake it. Don’t smell it. Instead, keepothers away from it, put it in a plastic bag and seal it. Thenwash your hands with soap and water and call 911,”advised Potter. “Law enforcement authorities will take itfrom there.”

“The U.S. Mail is too important to this nation to allowconfidence in the mail to erode,” said Potter.

The Postal Service, he added, delivers 680 million piecesa day; 208 billion pieces of mail a year; represents anindustry that drives American commerce; and stillprovides universal service for every family in the nation.

“With additional vigilance — and with additional workwith our customers and the public — we won’t let thatconfidence erode,” said Potter. “Americans value what’s inthe mail.”

Source: http://www.usps.gov

Source: http://www.usps.gov

.

Exhibit 6: Press Release October 23, 2001

USPS News: Press Releases

FOR IMMEDIATE RELEASE

The United States Postal Service:What We Can Do to Make the Mail Safe

Tuesday, October 23, 2001

To make the mail safe, the Postal Service is taking four important steps:

EDUCATE, INVESTIGATE, INTERVENE andPREVENT

The Postal Service is EDUCATING EMPLOYEES,BUSINESSES and THE PUBLIC

EMPLOYEES:

• 800,000 Postal Service employees are now part of thefront line of defense against terrorism

• Like police officers and firefighters, Postal Serviceemployees have given their lives in the war on terrorism

• We will not be defeated. We will not surrender. We willdo everything humanly possible to make the mail safeand keep it moving.

• Our employees are a formidable force: 800,000 strong,located on every street and in 38,000 post offices andfacilities

• We have directed our employees to exercise extremevigilance and caution in handling and delivering the mail

• We are providing our employees with up-to-the-minuteinformation about the risks associated with anthraxand the best methods for handling mail

• Information and vigilance are our employees’ bestweapons in the fight to keep the mail moving anddefeat terrorism

BUSINESSES:

• More than 90 percent of America’s mail originates withbusinesses, which can make the mail safe byemploying heightened scrutiny and security measures

• In the past week, we have produced videos explainingsafe mail room procedures and provided them to15,000 businesses

• We are educating people who handle mail at high-profile organizations that could be potential terroristtargets; they can take special precautions to protectthemselves and others where they work

• This is not a one-size-fits-all program; we encouragebusinesses to assess their individual situations andtailor their mail handling accordingly

THE PUBLIC:

• The best tools the public can use to make the mailsafe are CAUTION and COMMON SENSE

• The Postal Service has mailed postcards to everyaddress in the nation explaining how to identify andisolate suspicious mail; FOLLOW THESE COMMONSENSE DIRECTIONS

• The proper steps are simple: Don’t open or shakesuspicious mail; Isolate it; Call the appropriateauthorities

• We are consulting the foremost public health experts toget the best advice for dealing with medical issues

• We are committed to providing the public with thebest, most current information we have about thestate of the mail

• Stay informed; the news media are providing up-to-the-minute information about the state of the mail

• Send a card or letter to someone you know or love;don’t be defeated by terrorism

• Use the new “United We Stand” stamp that the PostOffice is issuing Wednesday 10/24/01

.

The Postal Service is INVESTIGATING to see that justice is done

• The Postal Inspection Service has 1,900 inspectorswho are working night and day to bring theperpetrators of this attack to justice

• While we don’t provide details of our investigation, wehave gathered significant information that can help ustrace the origins of this attack and the originators

• We are offering a $1 MILLION REWARD for informationleading to the capture of the terrorists who attackedthe mail; you can provide tips by calling 800 CRIME-TV

• We will not tolerate any act that spreads fear throughthe mail

• We are dealing harshly with hoaxes that falsely invokethe threat of anthrax; they divert resources away fromfighting real threat and needlessly spread fear

The Postal Service is INTERVENING if the public or our employees are put at risk by terrorism

• We have now lost members of the Postal Servicefamily to this attack; nothing could be more painful ormore serious to us

• We are doing EVERYTHING HUMANLY POSSIBLE toassure the safety of our workers and the public

• We are consulting the foremost public healthauthorities and basing our decisions on the up-to-the-minute information they provide

• This is a new day and we are dealing with a new threat;we are moving quickly and decisively when newinformation becomes available

• We have taken CONCRETE STEPS to react whenworkers are threatened:

o When we have evidence that a postal facility hasbeen contaminated, we have closed itimmediately

o When we have evidence that postal employeeshave been put at risk, we provide the appropriatetesting or medication, depending on what healthauthorities advise us to do

o We are working closely with union leaders to helpcommunicate safety procedures to our workersand ensure they are followed

The Postal Service is PREVENTING potential problemsby adopting tough new safety measures

• We are taking CONCRETE STEPS to assure the safety of the public:

o We are adopting and IMMEDIATELY deployingnew technology that will fight anthrax that mightmove through the mail

o This new technology is already being usedsuccessfully to fight bacteria in the food supply

o This new technology will not be cheap but we arecommitted to spending what it takes to make themail safe

• We are taking CONCRETE STEPS to assure the safety of our workers:

o We are providing all our employees who processmail with masks and gloves for their protection;though there is no definitive public-health answerabout the level of protection these devicesprovide, we are leaving no stone unturned

o We are directing all our employees to notify us ifthey seek admission to a hospital, so we canquickly detect any pattern of medical problemsthat might develop

o We are changing the procedures we use to cleanmail sorting equipment; we are no longer usingair gusts to scatter dust and other particles, andinstead are vacuuming equipment in a way thatabsorbs dust and other particles

o We are directing postal facilities to use stronger,antibacterial cleaning chemicals as part of theirroutine maintenance

Source: http://www.usps.gov

.

Megan Perry, Laura Chia, Meredith Stevens and Rupa RajagopalanFaculty Adviser: Yan Jun

School of JournalismUniversity of Missouri

Managing the Tide, Marketing to Controversial Demographics

WINNING ENTRIES – COMMUNICATIONS/JOURNALISM SCHOOLS

I. A Cultural Evolution

The year is 1946, Susie Homemaker dons her freshly starched apron,

excited to try out Procter & Gamble Co.’s new laundry care wonder

product, Tide® on this week’s wash. The aroma of Folger’s® brewing

in the kitchen wafts up the stairs, signaling the start of another busy

day for her husband, Mr. Homemaker. Little Timmy’s sniffles seem

to be healing, thanks to a healthy dose of Vick’s Vaporub®, and baby

Molly is cooing in her fresh Pampers® diapers. All is well in this

picture perfect American home, thanks to Procter & Gamble.

Fast forward to the year 2000, a pile of tousled shirts, sport coats,

dress slacks, ties and freshly polished shoes lying on the bedroom

floor. The remnants of a night of passion lay strewn haphazardly

over the foot of the bed, and in the background is a blurred image of

two men in an intimate embrace. Thanks to Procter & Gamble’s new

Downy Wrinkle Releaser, ironing is the last thing on this couple’s

agenda.

Over the years, the company that has its foundation in quality

products for the house and home has made several efforts to keep

up with the ever-progressing American culture while maintaining its

traditional family appeal. Four years after its publication, this latest

advertisement is stirring up some controversy. It is part of the latest

addition to a series of attacks on P&G’s reputation. In this case

study we pose the question: “In this climate of continuous cultural

progression, how can a single company cater to all demographics

tactfully, especially when controversies arise?”

II. Procter & Gamble Co:strength and susceptibility

Founded in 1837, Procter & Gamble has built its business on its

brands and family oriented reputation, (www.pg.com). The

distribution giant surged to the forefront of consumer product

divisions with its cutting edge technology, research, and marketing

techniques. Basing its business on the strength of its brands

including billion dollar items Tide®, Pampers® and Pantene Pro

Vitamin® shampoo, P&G leads the industry in building strong

brands and maintaining the reputations of its products and

company, (www.pg.com).

P&G’s name and reputation add to the strength of the company’s

marketing efforts. However, in some instances that strong

reputation serves as a double-edged sword, leaving P&G vulnerable

to highly publicized attacks from critics. In the early 1980s, rumors

circulated about P&G’s logo secretly concealing the demonic

notation, 666, “the mark of the beast,” in its depiction of 13 stars,

(See Appendix, Figure 1). This claim was then altered, warning

consumers to look out for the 666 mark appearing in the logo’s

depiction of what looks like a ram’s horn:

“If you are not sure about the product, look for a Procter &

Gamble written on the products, or the symbol of a ram’s

horn, which will appear on each product beginning on April.

The ram’s horn will form the 666, which is known as Satan’s

number.” (Emery, 1998)

.

This allegation was followed by tales of a P&G official appearing on

the Phil Donahue television talk show and pledging loyalty and

financial support to the Church of Satan, (Emery, 1998). An e-mail

said to have been circulated around the globe outlined this claim

stating:

“The President of Procter & Gamble appeared on the Phil

Donahue Show on March 1, 1994. He announced that due to

the openness of our society, he was coming out of the closet

about his association with the church of Satan. He stated that

a large portion of his profits from Procter & Gamble Products

goes to support this satanic church. When asked by Donahue

if stating this on TV would hurt his business, he replied,

‘THERE ARE NOT ENOUGH CHRISTIANS IN THE

UNITED STATES TO MAKE A DIFFERENCE.’” (Emery,

1998).

This statement was quickly refuted by Phil Donahue in a letter to

P&G. Donahue stated, “The president of P&G has never appeared

on my show, nor has any other P&G executive.” (Emery, 1998)

These “urban legends,” while ludicrous, still brought replies and

inquires from several P&G consumers. E-mails bearing this

information continue to circulate evoking over 200,000 customer

replies, (Emery, 1998). P&G responded with lawsuits against Amway

Corporation and 11 other competitors whom the company accused

of spreading these false claims. In defense of the company’s actions,

a P&G spokesperson spoke out in an online urban legends

publication saying, “[The lawsuit] involves our company’s

reputation and loss of business. We know consumers around the

world have been diverted from buying our products.” (Emery, 1997)

Procter & Gamble has expanded into a global community of nearly

98,000 employees working in almost 80 countries worldwide,

(www.pg.com). With this kind of exposure, the company has made

a commitment to diversity and inclusion, attracting an employee

base that more accurately reflects its target market demographics.

Listing its core values as leadership, integrity, trust, ownership and

passion for winning, the company strives to recruit bright, creative

young minds to tap into new trends and movements in product

development and advertising, (www.pg.com). P&G outlines its

commitment to diversity by stating on its Web site, “We Show

Respect for All Individuals. We believe that all individuals can and

want to contribute to their fullest potential. We value differences. We

inspire and enable people to achieve high expectations, standards,

and challenging goals. We are honest with people about their

performance.” (www.pg.com)

These efforts by P&G to appeal to a variety of demographics as well

as be on the edge of creative advertising have landed the company in

its latest reputation scandal. Procter & Gamble targets the “high

potential shopper,” or the middle to upper class consumer who

would rather spend a little extra cash for the highest quality

products that will save them time and preserve their belongings.

Consequently, 80 percent of the company’s business comes from

only 20 percent of the consumer population at large, (Procter &

Gamble Company Profile, 2004). While P&G has traditionally

catered to conservative middle-upper class stay-at-home mothers,

the emerging gay market plays directly into P&G’s target audience as

well. According to the Scarborough consumer research Web site, gay

and lesbian consumers account for $450 billion in buying power and

this market is still relatively untapped, (http://www.scarborough.

com/opus.htm).

III. The American Family Association:holding on to tradition

The American Family Association (AFA) is a non-profit Mississippi-

based organization concerned with preserving traditional American

family values. Founded in 1977 by ordained Methodist minister Don

Wildmon, the AFA is not specifically a Christian organization,

although a significant portion of its members are Christians, and the

language and practices used by the AFA show heavy Christian

influence, (www.afa.net). The organization blames the decline of

American values on the media, particularly the entertainment

industry. Its Web site states:

“AFA believes that the entertainment industry, through its

various products, has played a major role in the decline of

those values on which our country was founded and which

keep a society and its families strong and healthy. For

example, over the last 25 years we have seen the

entertainment industry ‘normalize’ and glorify premarital sex.

During that time we have suffered a dramatic increase in teen

pregnancies, sexually transmitted diseases such as AIDS, and

abortion as a means of birth control,” (www.afa.net).

Consisting of over two million members, the organization keeps a

close watch on media outlets and frequently updates members on

hot button issues through e-mails and letters, which urge members

to take action, (www.afa.net). As a media watchdog, the AFA claims

its efforts have led to changes in the American entertainment

industry. A few changes the AFA claims to have affected include

advertiser pull-outs of TV shows like Ellen, a sitcom with

.

homosexual characters, and radio shows like the Howard Stern radio

show, a racy radio talk show with adult themes, (www.afa.net). ABC

did eventually drop Ellen, citing low ratings as the reason for the

show’s departure. However, there is no direct evidence linking any

of these events to the AFA’s efforts. The AFA’s most recent campaign

is a highly publicized boycott on three Proctor & Gamble products:

Pampers®, Tide® and Crest®. The headline, “P&G Comes Out of

Closet During Prime Time” occupies the very top of the

organization’s homepage. The Web site also provides links to related

stories, including details of P&G’s support for the “homosexual

agenda,” (www.pgboycott.com/promotion.asp). The AFA created a

separate Web site devoted to this campaign at PGBoycott.com. The

site urges members to print P&G petition forms and distribute these

forms to their friends, church and Sunday school members.

IV. Back to the Beginning: events leading up to the boycott

In 2000, as part of continuous attempts to gain a foothold in the gay

market, P&G released an ad for Downy® Wrinkle Releaser in Xtra, a

Toronto gay newspaper, (See Appendix, Figure 2). The double

spread ad stated “You were more concerned with taking them off

than folding them up,” (Commercial Closet, 2004). The background

of the ad pictured a blurred image of two men in bed in what

appeared to be an intimate embrace. The foreground featured a pile

of men’s clothes and shoes scattered over the bedroom floor. The

second page of the ad laid out the story plot: “It’s 10 a.m. Saturday

morning. You’re meeting friends for brunch in an hour. And your

khakis – which spent the night crumpled on the floor – are looking a

little too ‘casual’...Now for the good news,” (Commercial Closet,

2004). The tagline read: “So if you want to reduce wrinkles – the fast

and easy way – try Downy® Wrinkle Releaser. You’ll never be scared

to face the “morning after” again,” (Commercial Closet, 2004).

This ad ran exclusively in Toronto and was not considered

controversial by Canadian viewers at the time of its release.

However, four years later the ad started gaining attention in the

United States after being brought into the spotlight by the AFA.

Former Downy® brand manager Jeff Straker described the process

the ad went through in order to be published in gay publications in

Canada. “We launched [Downy® Wrinkle Releaser] targeted

partially to gay men and their finicky clothing habits. The ads were

focus group tested with gays, lesbians, and bisexuals and were

thought to be rather breakthrough...It’s interesting that this ad I did

a few years ago, which raised no neck hairs then, is apparently

controversial now,” (Commercial Closet, 2004). The AFA targeted

this ad in September 2004, when the organization decided to boycott

Procter & Gamble products, (Crary, 2004).

V. The Boycott

In September 2004, in the midst of an election season that included

a highly controversial debate over gay marriage, P&G was criticized

by the AFA for attempting to advocate its own political agenda. This

criticism centered around P&G’s position on an article that was up

for repeal in Cincinnati, the home-base for P&G operations. Article

12, which was passed in 1993, was placed on the November 2004

ballot for Cincinnati voters to decide whether it should be repealed

or remain as a charter amendment, (Crary, 2004). Article 12 stated

that people with gay, lesbian or bisexual orientation should be

excluded from seeking protection from discrimination based on

sexual orientation, and that the city of Cincinnati may not endorse

or implement laws also based on sexual orientation, (Nolan, 2004).

On August 23, 2004, P&G executives sent a statement to Cincinnati

employees discussing Article 12 and affirming P&G support for the

repeal of Article 12, (Antoine and Otto, 2004). The letter stated

P&G’s position, which was that all people deserve protection from

discrimination, that Article 12 was outdated, that the article

negatively affected the city and the region’s image, and that the

article was the only law in the U.S. that allowed discrimination

against certain groups of people, (Antoine and Otto, 2004). P&G

explicitly maintained that in supporting the repeal, it was not

promoting any specific lifestyle, but instead was “supporting values

of respect and tolerance,” (Antoine and Otto, 2004). P&G also

donated nearly $40,000 to the repeal effort, which was also backed

by Cincinnati mayor, Charlie Luken, (Nolan, 2004). The AFA

disagreed with P&G’s ongoing support of what it called a

“homosexual agenda,” and believed a boycott would send P&G a

message that America’s families did not support homosexual activist

groups who promote homosexual marriage, (Wildmon, 2004). The

boycott included all P&G products, but especially Tide® detergent,

Crest® toothpaste, and Pampers® diapers. The AFA encouraged

members of like-minded communities, including the Christian

ministry Focus on the Family, to spread the word about the boycott

and asked people to sign petitions stating: “Yes, I support the boycott

of Crest®, Tide® and Pampers® because of P&G’s support of the

homosexual agenda, including homosexual marriage,”

(www.afa.net).

The top story on the AFA Web site for the past few months has been

updates on the latest information concerning P&G and its stance on

various issues, (www.afa.net). The AFA’s list of grievances against

Procter & Gamble include: P&G’s support of the repeal of Article 12,

the company’s required employee diversity training that “promotes

the acceptance of homosexuality,” the ad in Xtra, the company’s

sponsorship of television programs such as Will & Grace and Queer

Eye for the Straight Guy, the naming of the company by

PlanetOut.com as one of the top 20 places to work because of its

.

support and benefits for gay employees, the company’s pull-out of

all advertising for television talk-show host Dr. Laura Schlessinger

for her anti-gay remarks, P&G’s policy of domestic partnership

benefits, and the list goes on, (www.pgboycott.com/promotion.asp).

Though many corporations joined the coalition to defeat Article 12

and providing domestic partnership benefits is a rather common

corporate policy, P&G was singled out for the boycott because of its

high national profile, (Crary, 2004).

In an article in the Associated Press, Doug Shelton, a spokesperson

for P&G, stated that the boycott would not affect the company’s

position on the repeal of Article 12, (Crary, 2004). He said, “We

believe Article 12 is bad economic policy for Cincinnati,” (Crary,

2004). As for the AFA’s charge that P&G supports gay marriage as

part of the “homosexual agenda,” Shelton said that the company has

made no such endorsement nor has it taken any position on the

issue (Crary, 2004). Shelton did say, though, that the controversial

ad in Xtra should not have been published saying, “We freely admit

it was a mistake. Even if the ad had featured heterosexuals, it never

should have run – it was in violation of our advertising guidelines,”

(Crary, 2004).

VI. What this means for Procter & Gamble Co.

The AFA claimed that, to date, around 300,000 people have signed

on to its boycott, (Holmes, 2004). However, the impact on P&G

sales has been minimal. Profits have been more or less stable over

the past 10 months, and the company has seen an 18.5 percent

revenue growth over the past year, (Procter & Gamble Company

Profile, 2004). This lack of financial damage to P&G has not slowed

the campaign by AFA and its supporters. Focus on the Family’s vice

president for public policy, Tom Minnery, said that his organization

along with the AFA would not end the boycott anytime soon. He

said, “We don’t measure the success by decline in sales – we measure

it by the rise in controversy,” (Crary, 2004). If wanting significant

financial impact, the AFA/Focus on the Family boycott may have

serious implications for P&G’s reputation management. The AFA

has had considerable success in effecting change through increased

publicity for its causes in the past, and the P&G boycott is no

different. The story was picked up by the New York Times and the

Associated Press on September 17, 2004, a few weeks after the boycott

began, (Kirkpatrick, 2004). The Associated Press story was then

covered by several newspapers around the nation, along with two or

three follow-up stories in the following months (Crary, 2004). AFA

spokespersons have appeared on several television talk shows, and

the organization has been actively recruiting conservative religious

organizations around the nation since September, (www.afa.net).

This substantial media attention forces P&G to respond not only

back to the AFA and national news media, but also to other

important stakeholders on whom the situation may have bearing.

These stakeholders include P&G’s consumers, who support a wide

spectrum of beliefs and values, employees, who because of P&G’s

efforts are equally diverse, advocacy groups on both sides of the

issue, and finally, P&G stockholders, who must be considered when

any company issue arises. To date, P&G has chosen to field

consumer concerns and inquiries through personal communication.

Company spokesperson Doug Shelton, asked P&G’s consumers to

call the company to clear up any questions or misconceptions,

(Crary, 2004). A few consumer groups have begun debating the

issue among themselves, however, as evident in recent posts to the

Tide® Fabric Care Network message board. The online message

board, usually used to post questions or comments about P&G’s top

selling product, Tide® laundry detergent, has recently been used to

share opinions about the AFA’s allegations against the company,

(www.tide.com/messageboard). These messages represented

supporters of both sides of the issue with one consumer saying,

“Because of the strong support of the homosexual agenda, I am

boycotting ALL Procter & Gamble products, which is unfortunate,

because there are so many great products that I have used for years,”

(www.tide.com/messageboard). Another consumer responded, “I

not only will purposely buy Procter & Gamble products, I will also

tell everyone I know to buy the products. It’s nice to have an

American company that is so enlightened,”

(www.tide.com/messageboard). Like these consumers, advocacy

groups on both sides of the issue worked to make their voices heard.

As mentioned before, several organizations, including many

religious groups, have joined the AFA in condemnation of P&G’s

actions, (www.afa.net). On the other hand, several gay advocacy

organizations have encouraged members to support P&G for its

progressive policies. GayToday, a website providing daily news

updates for the gay community, posted a bulletin asking all its

members to “contact Procter & Gamble one more time and thank

them profusely for standing up for equal rights for all Americans,”

(www.gaytoday.badpuppy.com). The bulletin provided contact

information for P&G as well. Employees and stockholders are two

more groups that include members who support either side of the

issue, or who do not understand the matter at all.

Cultural evolution is an unavoidable phenomenon that corporations

have faced since the beginning of industrialization. Leading global

companies, like P&G, have the added stress of catering to a wide

spectrum of publics. In many cases, these publics fall on opposite

ends of a polarizing debate. Such is the case for P&G. Traditionally

a family-oriented company, P&G is now in a cultural climate where

the definition of the word, “family,” is constantly changing. The

question then arises: How can a company balance the fine line

between progression and tradition? How does a corporation

accommodate one economically viable market without offending an

opposite, yet equally valuable one?

.

VII. Works Cited

“Action Alert: Procter & Gamble & Dr. Laura”. (2004, December). GayToday: World.http://gaytoday.badpuppy.com/garchive/world/061400wo.htm

Antoine, D., Otto, C. (2004, August 23). Letter from Procter & Gamble.

“Conservative groups call for boycott of 2 P&G products”. (2004, September 17). TheAssociated Press. Business News section

Crary, David. (2004, October 26). “Conservatives vow lengthy boycott of Procter &Gamble over gay rights; company disputes their claims”. The Associated Press. BusinessNews section.

Emery, David. (1997, August 4). “Sympathy for the Devil”. Urban Legends Online.http://urbanlegends.about.com/library/weekly/aa080497.htm

Emery, David. (1998, June 10). “Trademark of the Beast”. Urban Legends Online.http://urbanlegends.about.com/library/weekly/aa061098.htm

Holmes, Paul. (2004, November 15). “Friendly Companies Face Harsh Realities of USLife as Christian Groups Wield Influence”. PR Week (US). p13.

Kirkpatrick, David D. (2004, September 17). “Conservatives Urge Boycott of Procter &Gamble”. The New York Times. pA18.

Nolan, John. (2004, November 2). “Cincinnati ban on gay rights laws back on the ballot”.The Associated Press State and Local Wire. Political News section.

Osbourne, Kevin. (2004, November 3). The Cincinnati Post-Online Edition .http://www.cincypost.com/2004/11/03/cincygay110304.html

PGBoycott.com. (2004, December). “A short track record on P&G’s promotion ofhomosexuality”. The American Family Association.http://www.pgboycott.com/promotion.asp

Procter & Gamble company website. (2004, December). www.pg.com

Scarborough Research Co. (2004, December). “Gay/Lesbian Consumer Study”.http://www.scarborough.com/opus.htm

The American Family Association Online. (2004, December). www.afa.net

The Commercial Closet. (2004, December). “Bed Clothes: Downy Wrinkle Releaser ad.”http://www.commercialcloset.org/cgi-bin/iowa/portrayals.html?record=732

The Procter and Gamble Co. Company Profile. (2004, December). Yahoo! Finance.http://biz.yahoo.com/ic/11/11211.html

The Tide Fabric Care Network Message Board. (2004, December).http://www.tide.com/messageboard/readcomment.jhtml?messageId=402028

Wildmon, Donald E. (2004, September 20). “Personal Statement”. The American FamilyAssociation Online. www.afa.net

Figure 2: P&G ad for Downy Wrinkle Releaser in Xtra, a Toronto gay newspaper.

http://www.commercialcloset.org/cgi-bin/iowa/portrayals.html?record=732

VIII. Appendix

Figure 1: The old P&G logo involved in the demonic notation claims

http://en.wikipedia.org/wiki/Image:P%26glogo.jpg

.

Alison Fors, Brandie Gonzalez, Elizabeth Hawkins, Brittney McLawsFaculty Adviser: Brad Rawlins

College of Fine Arts & CommunicationsBrigham Young University

Boeing Co.: Government Contracts and Conflicts of Interest

The Challenge of Being Ethical and Competitive

“Because we dared to dream, dared to work hard, we haveturned dreams into realities, to leave some huge footprints onevery aerospace frontier. Now it is time to create some newfootprints!” ~ Phil Condit, CEO, 1996

Boeing Chief Executive Phil Condit stared blankly at the road early

Saturday evening as he drove to Boeing Headquarters. He drummed

his fingers on the steering wheel, contemplating the crucial decision

at hand. The Boeing Board of Directors was to gather that night to

decide whether or not to fire Chief Financial Officer and Executive

Vice President Mike Sears and Darleen Druyun, the vice president of

missile-defense systems. Recent events had caused executives to

question the appropriateness of the hiring of Druyun by Sears. Sears

offered Druyun a job last year while she was employed as an

acquisition official for the U.S. Air Force. At the time, she was

reviewing a $21 billion proposal for the Air Force to lease 100

Boeing 767 air-borne-refueling tankers. Boeing assigned external

and in-house lawyers to review Sears and Druyun’s conduct more

than a month ago. In the initial stages of the investigation the

lawyers did not find any impropriety; two weeks ago, however, the

fate of Boeing changed when the lawyers uncovered improper

contact between Sears and Druyun. The lawyers discovered evidence

from e-mails and interviews that Sears contacted Druyun about

employment with Boeing in October 2002, while she was reviewing

the tanker contract. This directly violated Boeing’s hiring policies.

Condit grew weary recalling that these events have surfaced only

months after Boeing lost $1 billion in government contracts and was

suspended from new space contracts, following the scandal

involving stolen Lockheed Martin documents.

As Condit sat at the head of the table with other board members,

they discussed the most recent developments of the case, including

statements by Defense Secretary Donald Rumsfeld and Senator John

McCain that indicated further investigations and possible

suspensions of government contracts. The board realizes that the

current situation could hamper the positive relations recently gained

with the Pentagon. These positive relations are based on renewed

emphasis on ethics at Boeing, but the Sears-Druyun scandal seems

to give fuel to Boeing critics and an edge to its competitors.

History And Culture

From the Battlefields to the Moon

William Boeing left Yale University to seek a life out West in 1903,

the same year the Wright brothers made aviation history with their

first flight in North Carolina. William Boeing expressed his vision

when he said, “We are embarked as pioneers upon a new science and

industry in which our problems are so new and unusual that it

behooves no one to dismiss any novel idea with the statement, ‘It

can’t be done’.” Soon after the Wright Brothers’ achievement,

William Boeing began his career of building aircrafts. In 1916,

Boeing constructed his first two twin-float seaplanes and started his

airplane manufacturing company, Pacific Aero Products Company.

Two year later, the business became Boeing Airplane Company.

World War I was the beginning of the nation’s aviation involvement

in combat. During this conflict, the United States began its first use

of airplanes in battle. Boeing Airplane Company received its first

production order when the U.S. Navy ordered 50 of Boeing’s Model

C planes. This Navy order, combined with an international aviation

evolution, jumpstarted the rapid growth of the Boeing Airplane

Company.

From 1922 to 1925, the U.S. Navy awarded Boeing with a contract to

build primary trainer airplanes and subsequently bought 71 of those

trainers. In 1923, Boeing began a race with the Curtiss Aeroplane

and Motor Company to design the best pursuit fighter. Although

they lost the race, six months later Boeing became the leading

producer of fighters, a position they retained for the next decade.

William Boeing resigned in 1934 following the Depression that left

Boeing Airplane Company broken into three entities. Additionally,

Claire Egtvedt became president and began focusing the company

engineering and production toward large commercial planes and

army bombers.

.

By the early 1940s, Boeing was prepared to contribute to another

war. During this time, Boeing was rapidly producing B-17 bombers

for World War II. As men went to battle, women took over the

workforce and boosted production up from 60 planes to 362 planes

a month in Boeing’s Seattle manufacturing center.

Immediately following the war, the military stopped buying planes

and Boeing took a huge blow once again. Factories shut down and

70,000 people lost their jobs. Boeing scurried to find a new niche in

the market. They began focusing on commercial jets and in 1962,

manufactured two planes specifically for the U.S. President tactfully

named “Air Force One.”

Throughout Boeing’s history, the company has consistently

maintained a vital relationship with the government. This

relationship encouraged the company to venture beyond that of

warfare aircraft and contribute in the race to space. In 1961, when

President John F. Kennedy committed to Americans that the United

States would land a person on the moon, Boeing was an avid

supporter of space technology. At this time, Boeing loaned NASA

2,000 executives to assist in the race.

In the early 1970s, Boeing experienced a third crisis. Boeing went 18

months without a single order for a commercial jet due to the

recession in the aviation industry. In Seattle alone, the workforce

was cut again from 80,400 to 37,200. There even appeared a

billboard in Seattle that read: “Will the last person leaving Seattle

turn out the lights.”

As a member of the volatile aviation industry, Boeing experienced

repeated ups and downs. This consistent swing from success to

struggle was difficult for employees and company executives. “T”

Wilson, the CEO of Boeing in 1969 candidly described Boeing’s

orientation during times of feast or famine. He said, “When we’re

flat on our backs, nobody else looks so bad because we’re so big. But

when we get moving, watch out. The momentum is tremendous.” To

combat this decline in business during the ’70s, Boeing turned to

innovation to remain alive. Once again, Boeing decided to diversify

its production offerings. This time, Boeing began selling computer

products, irrigating an Oregon desert, managing housing projects,

producing light-rail vehicles, constructing a desalinization plant to

convert sea water to fresh water and building wind turbines.

The company again experienced improved growth in the early

1990s. Boeing began work on B-2 stealth bombers and merged with

Rockwell International Corporation and McDonnell Douglas

Corporation. In 2000, Boeing bought Hughes Electronics

Corporation, Jeppesen Sanderson, Inc. and Hawker de Havilland.

After the September 11th attacks at the World Trade Center, Boeing’s

planes were used in battle in Afghanistan restoring positive press

coverage and public opinion. President George W. Bush recognized

Boeing on November 9, 2001 as one of four recipients of the 2001

Employer Support Freedom Award for their assistance and

donations after the national crisis.

Despite a flip-flopping reputation, Boeing has continued to be the

world leader in missile defense, battle space management and space-

based communications. They serve customers in 145 countries,

employ workers in over 60 countries and operate in 26 states. Sales

in 2003 were $50.5 billion, 30 percent of which were international.

Eighty percent of sales in Europe and 90 percent in Asia are from

commercial airplanes. A smaller percent of international sales

comes from Integrated Defense Systems, which acquires 50 percent

of the sales domestically.

Employees: the Lifeblood of Boeing

Boeing’s strength and competitive advantage in the marketplace

resulted largely from the strong emphasis placed upon the

importance of company employees. Boeing invests a great deal of

capital into its employees’ lives and relies upon their work ethic and

strong capabilities. Frank Shrontz, Boeing’s CEO in 1986, described

employees as one of the company’s most valued resources. He said:

“To ensure our continued success, we support our most

critical resource: the people of Boeing... At Boeing, we inspire

and recognize individual talent, provide job security based on

performance, and foster a team spirit and the feeling of

personal satisfaction that comes from a job well done. “

The company strives for continual quality improvement and

encourages a balanced work and life culture through their benefits

programs.

Boeing’s Lifelong Learning program gives employees the

opportunity of advanced education and career development. This

program allows employees to finish a college education with full

benefits while at Boeing. The company attributes its high-caliber

workforce and production to its dedication in the continual

improvement and education of their employees. Boeing has invested

over $73 million in the Lifelong Learning Program and saw more

than 1,400 Boeing employees obtain degrees in 2003.

However, Boeing’s sudden announcement to move headquarters

from Seattle to Chicago in June 2001, stirred up strong feelings

throughout the corporation. The hasty announcement left Boeing

employees and the community in Seattle outraged and uncertain of

the future. Tom Buffenbarger, president of the International

Association of Machinists and Aerospace Workers (IAM), which

embodies 63,800 Boeing workers worldwide, said,:

“The Seattle community has invested billions of dollars in

highways, schools, and other services to help Boeing

succeed...If this move indicates any lessening of Boeing’s

commitment to this city or to the domestic aerospace

.

industry, if Boeing thinks they can run and hide, we have

news for them. We will follow Boeing to the ends of the earth,

if need be.”

A similar comment came from IAM District Lodge 751 president

Mark Blondin:

“We are outraged at this decision, not to mention the fact that

Boeing gave this Union, as well as our Governor and

Congressional delegation, only five minutes’ advance notice

before announcing it to the world. It is a sign of disrespect for

the workers, the Union and this community. As a Union, we

fear this is a sign of things to come and will fight with all our

resources to protect every 751 job.”

The most recent employee setback was the announcement in July

2003 of a 5,000 job cut by the end of the year, due to the worst

downturn in airline industry history. This notice again left

employees and the public weary of Boeing and its leadership.

A Rocky Past: Scandals at Boeing

Boeing has experienced tremendous success throughout its history.

Though much of this success is attributed to employees, the

company prides itself on the success of other assets, values and

philosophies. In addition to a strong commitment to employees,

Boeing focuses on running a healthy business by leveraging

strengths into new products, actively seeking growth opportunities

and opening new frontiers. Many of these opportunities are

connected to acquiring government contracts. The co-dependent

relationship with the Pentagon has led to several publicized

scandals.

Government spending on defense in mid-1980s placed the Pentagon

and its military contracts in a fishbowl. There were reports of the

Pentagon paying outrageous prices for spare parts: $659 for an

ashtray, $640 for a toilet seat, $400 for a claw hammer, and $748 for

a pair of pliers. Although Boeing wasn’t the only defense contractor

guilty of the overcharges, it did receive special media attention for

the $748 duckbill pliers. When a government engineer reported the

price tag of the pliers to a Senate subcommittee, Boeing slashed the

price of the pliers to $90. The engineer testified that similar pliers

could be purchased at a hardware store for $7.61. Boeing dropped

the prices of nearly 50 other tools included in the same Air Force

contract, which was worth $557,500. But, Boeing also tacked on a

“support equipment management” charge of $95,307 that pushed the

cost of the tools to the exact amount of the original contract, $557,500.

During this same period, government contracts were suspended and

fines levied at General Electric, General Dynamics, Sperry

Corporation, Honeywell, McDonnell Douglas, Lockheed, and

Boeing for price gouging, fraud, and use of classified documents.

The use of Pentagon documents to gain a competitive edge in

contract bids was a somewhat common practice prior to the Senate

investigations of 1984-1985. Frank Shontz, CEO of Boeing in the

1980s and early 1990s, said that numerous defense contractors were

obtaining classified budget documents from the Pentagon without

the required authorization, until the 1985 indictment of a

consultant for GTE Corporation. It was common for companies to

receive the documents and place them in a classified documents

control log that contractors were not supposed to see. According to

Dan Pinick, then president of the Boeing Defense and Space Group:

“People acquired documents from the government, and the

government knew it. They never stole any of them. The

government gave them those documents, as far as I know.”

Two investigations into inappropriate use of classified documents by

Boeing employees surfaced in 1984 and 1985. The first case, known

as the Park Service case, involved a $5.9 million contract with the

National Park Service to provide a nation-wide computer network.

Boeing won the contract in 1984, then gave it up when a competitor

complained about the bidding process. This began a federal

investigation that found two employees had used leaks and

unauthorized inside information to develop the bid. The Boeing

Computer Services staff in Vienna, VA, wrote nearly 40 percent of

the proposal for bids, including the evaluation criteria. Willis

Winder, a salesman, obtained part of the draft from Boeing’s

competitor, and it was used for a “training exercise” in the bid effort.

With such competitive advantages, it was no surprise that Boeing

won the bid. Two employees involved in the Park Service case were

investigated but never criminally convicted for their behavior. The

statute of limitations ran out on the criminal charges. However,

Boeing fired the two employees, Winder and Robert Gerard, took

resignations from two others, suspended six, and reprimanded seven

more. Because of these actions, the Interior Department lifted its

suspension of contracts after 16 days, and threats of suspended

defense contracts were dropped. In response to the firing, both

employees told the press that they were “scapegoats” for higher-ups

in Boeing. They didn’t deny that the information Boeing had was

unauthorized, but “the fact that we had it was known and was

encouraged by our top-level management, and when the

(competitor’s) protest came in, they denied it.” Boeing denied any

cover-up, and cited its outstanding ethics programs to prevent

further problems. Joyce Ann Fleischman, deputy inspector general

for the Interior Department at the time, said Boeing’s degree of

cooperation was moderate. “They didn’t throw up huge major

roadblocks, which can be done at times, but they were not ready to

roll over and play dead.”

The second case resulted in the conviction of a Boeing marketing

executive on 39 counts related to possessing secret Pentagon budget

documents. Richard Fowler, who worked for Boeing from 1978 to

1986, was accused of obtaining more than 100 classified documents

from the Pentagon. Prior to his employment with Boeing, Fowler

was a civilian budget analyst at the Air Force. The case arose from

an investigation begun in 1984 of how military contractors were

.

obtaining access to classified Pentagon planning documents. Fowler

said his actions had been approved by superiors in the company. He

said he had been asked by officials at ‘’management levels’’ to obtain

the documents but said they were not vice presidents or directors.

‘’That’s what I was hired to do,’’ he said. Fowler also said that

procuring these documents was common practice in the industry

until the GTE investigation. During his federal trial, employees

from several military contractors testified of a nine-company

network whose Washington representatives traded Pentagon budget

documents in the late 1970s and early 1980s. Boeing also pleaded

guilty to receiving classified documents from Fowler, and paid fines

of $5.2 million.

After each of these scandals, Boeing attempted to beef up its ethics

programs and to educate all employees about the legal and ethical

ramifications of using insider information to procure federal

contracts. Despite these efforts, Boeing continued to deal with

federal investigations of overcharging and obtaining classified

information throughout the 1990s. The next decade included one of

the most damaging cases involving insider information, with a

competitive bid against Lockheed Martin resulting in a suspension

from Pentagon contracts.

Lockheed Martin Scandal

The Evolved Expendable Launch Vehicle Program

The U. S. Air Force began a program in the 1990s to find a low cost

rocket launching technology. Known as the Low Cost Concept

Validation (LCCV) the Air Force awarded two $60 million,

17-month contracts to Lockheed Martin Astronautics and Boeing

Defense and Space Group in the second phase of the project. This

money was granted for the pre-engineering and development of

their LCCV designs. Following the success of two LCCV phases, the

Air Force announced plans for the Evolved Expendable Launch

Vehicle Program (EELV). The objective of the EELV program was to

take the nation’s space launch system into the next century by

increasing operability and making the system more affordable.

In November 1997, the Air Force introduced competition to the

EELV program between the two companies. At this time, the Air

Force awarded Lockheed Martin Astronautics and Boeing Defense

and Space Group $500 million each for development costs, with the

possibility of future contracts worth up to $2 billion. Due to the

potential financial success of an improved launch system, the Air

Force also expected Boeing and Lockheed Martin to invest personal

funds into the EELV project. In addition to receiving the $500

million in development funds, both companies agreed to invest.

The Air Force also hoped the competition would stimulate and

strengthen the rocket industry’s commercial infrastructure.

With $500 million in development funding, Lockheed Martin and

Boeing began individual planning strategies. The two companies

would be competing for future contracts of 28 missions, scheduled

to occur from 2002 to 2008.

Kenneth Branch – Lockheed Martin or Boeing Employee?

Prior to 1996, Kenneth Branch was an engineer working on the

EELV project for Lockheed Martin. Reports confirm that in 1996,

Branch began conspiring with Boeing EELV engineer Kenneth

Erskine. According to Erskine’s affidavit, while still working at

Lockheed Martin, Branch approached Erskine in 1996 with an

under-the-table offer to provide Boeing with the entire Lockheed

Martin EELV proposal presentation. This proposal presentation

contained confidential plans and financial information detailing

Lockheed Martin’s monetary estimates and costs necessary for the

EELV projects. With this information, Boeing could under-bid

Lockheed Martin’s projects to the Air Force, increasing their chances

of winning the contracts. For more than a year, Branch purportedly

traveled to and from Lockheed Martin’s EELV headquarters in Cape

Canaveral, Florida and Boeing’s EELV headquarters in Huntington

Beach, California to provide Erskine with the proprietary

information. In January 1997, shortly after the alleged conspiracy

talks and visits, Erskine recruited Branch from Lockheed Martin

under the agreement that Branch would receive a higher salary while

working at Boeing in return for Lockheed Martin’s EELV proposal.

Boeing Wins Proposals

On July 20, 1998, approximately nine months after the Air Force

announced Boeing and Lockheed Martin’s participation in the EELV

competition, both teams submitted proposals for 28 Initial Launch

Service contracts worth over $2 billion. On October 16, the Air

Force awarded Boeing with 19 of the 28 projects and $1.38 billion .

Lockheed Martin was awarded the other nine and $640 million.

Short-Lived Success

Boeing’s success, however, was short-lived. Shortly after the

announcement of the awards, an anonymous Boeing employee

unveiled startling evidence to management. This employee revealed

information about stolen papers from Lockheed Martin’s EELV

project. Following the report, Boeing initiated an internal

investigation of the allegations.

During the investigation in June 1999, a Boeing attorney searched

the offices of William Erskine and Kenneth Branch. The attorney

found many documents labeled “Lockheed Martin

Proprietary/Competition Sensitive” in the employees’ offices. In

August, not long after discovering the documents, the two men were

terminated from Boeing.

.

Following the termination of Branch and Erskine, the Air Force

conducted an investigation of the issue. The documents found in

the offices of Branch and Erskine made up more than 3,800 pages

belonging to Lockheed Martin. Thirty-six of those documents were

labeled “Lockheed Martin Proprietary or Competition Sensitive.”

Sixteen of the documents were related to manufacturing costs of

Lockheed Martin’s EELV project proposals, seven of which the Air

Force believed gave Boeing a significant chance to win the

proposals. After the recovery of the stolen documents, United States

Air Force analysts claimed that had it known about the stolen

documents in 1997, the organization would have suspended the

EELV competition and conducted further investigations with the

possibility to terminate the project.

In September 2002, Boeing learned of a US Attorney investigation of

the company. As a result of this investigation, United State Attorney

Debra W. Yang exemplified the feeling of disappointment felt across

Washington. “The charges against Mr. Branch and Mr. Erskine

allege that they violated the fundamental rules of fair play,” Yang

said. “By covertly using a competitor’s secret information, they

caused harm not only to Lockheed Martin, but also to the Air Force

and taxpayers who finance government operations. Their improper

conduct had huge ramifications because of the value of the contract.”

Corporate Ramifications

Following the United States Air Force investigation, Boeing felt the

ramifications of the issue. On June 25, 2003, the Justice Department

charged former Boeing employees Branch and Erskine with criminal

charges of conspiring to steal proprietary documents from Lockheed

Martin. The two men were charged for “conspiring to conceal and

possess trade secrets”. According to the Defense Department, both

men faced up to 10 years in prison and over $250,000 in fines.

Earlier that month, Lockheed Martin filed a lawsuit with Boeing

claiming that 37,000 documents were stolen.

In addition to facing lawsuits, Boeing lost its entitlement to the

EELV contracts. Following an in-depth inquiry into Boeing, the Air

Force announced on July 24, 2003 that Boeing had committed

serious violations of federal law and, therefore, it would be

reallocating previously awarded EELV contracts.

Undersecretary of the Air Force Peter B. Teets stated the results of

the inquiry and ramifications surrounding the event: “Our inquiry

into Boeing found that they were in possession of thousands of

pages of Lockheed Martin proprietary EELV documents during the

1998 source selection. As a matter of policy we do not tolerate

breaches of procurement integrity and we hold industry accountable

for the actions of their employees. We believe the suspension is

necessary and we hope all contractors will take note and strive to

enforce the highest integrity standards in their organizations.”

Teets also announced Boeing would lose up to 10 of its scheduled

launchings with the EELV project. These changes boosted Lockheed

Martins EELV contracts to 14 and lowered Boeing’s to 12. Boeing’s

total estimated loss of funding from the Air Force was in the

ballpark of $1 billion. In addition to the lost contracts, three Boeing

Integrated Defense Systems units were suspended from competing

for new Government Issue competitions. The suspension was

indefinite until the government felt Boeing was ready to operate

ethically. The Air Force also granted Lockheed Martin a permit to

develop a west coast launching capability by updating the existing

facilities at Vandenberg Air Force Base in California.

This blow to future financial prospects and space and defense

technology development hit Boeing at the worst possible time. The

ramifications of the corporate scandal hinder Boeing’s decisions to

focus on government work due to the decrease in demand of their

commercial projects.

Ethics at Boeing

The Defense Industry Responds

After the Senate probes into defense contracts revealed extensive

fraud and insider information in the mid 1980s, the defense

industry responded with increased ethics training and a stronger

commitment to ethical and legal conduct. General Electric

Chairman John F. Welch Jr. initiated a massive employee education

and training program on ethics after GE was indicted on fraud and

suspended from bidding on government contracts. The program

included a 20-minute video, and the creation of a government

contracts review board and ombudsman. GE also set up a hotline

that employees could use to blow the whistle on unethical activities.

Sperry Corporation distributed a 10-page booklet on ethics

guidelines that employees not only had to read but certify they had

read it. Sperry CEO Gerald G. Probst – “a Mormon described by

colleagues as a stickler for integrity” personally walked around

Sperry’s facilities informing employees that they really meant what

they said. McDonnell Douglas provided one-day workshops for

employees and managers, appointed ombudsmen, and distributed

videotapes. General Dynamics responded by installing formal ethics

training courses, distributing a 20-page handbook, and establishing

a corporate ethics office, ethics program directors in each division,

and a Committee on Corporate Responsibility at the board level. As

a result of these efforts, contract suspensions were lifted and

competitive bids began anew.

Boeing also replied by setting up “one of the industry’s best ethics

programs” in the late 1980s according to then Senior Vice President

Douglas Beighle. Beighle said the Park Service case led to a whole

new approach to ethics. “I think it started the ethics revolution here

at the company.” Beighle gave a speech to 300 top employees, telling

them to follow strict rules in dealing with the government, and

hotlines were set up for anonymous complaints. An outside review

.

team interviewed more than 5,000 Boeing employees to ensure they

understood the rules of conduct with the government. He said

more than 1,200 problems were found and corrected. Over a two

and one-half year period, Boeing sent 15,600 managers through

training on dealing with the government.

Following the Lockheed Martin scandal, Boeing realized it needed to

push business ethics like never before. Senior management asked

the Ethical Leadership Group (ELG) to review the company ethics

program. ELG found that employees at all levels felt betrayed by the

individuals responsible and saw the media coverage as “a kick in the

gut” and “a stunning blow.” Despite negative sentiments, the ELG

also found Boeing employees believed the company had integrity

and were proud to work for such a successful endeavor. Despite this

optimism, ELG said changes needed to be made, including increased

training, greater monitoring, and more open communication.

While Boeing employees already received yearly ethics training, the

Integrated Defense Systems unit stopped work for all 75,000

employees and conducted a four-hour refresher course. The training

began six days after the U.S. Air Force announced the temporary

suspension resulting from the EELV issue, and emphasized enhanced

awareness and understanding of Boeing’s ethics policies. It also

aimed to reinforce the high values Boeing hoped to place on integrity

and reputation. During the training, employees were instructed on

proper ways to acquire and use third-party information. IDS

President and CEO Jim Albaugh told St. Louis employees, “Nothing

is more important than our reputation as an ethical company. And

this event is about refocusing our attention on ethics and the values

that have made Boeing what it is today.” Bill James, a senior manager

with IDS in Long Beach, Calif. said, “We all have the same

responsibility: Be ethical in everything we do.”

Boeing also implemented a new program in an attempt to make

training more interesting and effective throughout the year. The

2003 Ethics Challenge was put forth to emphasize to employees the

affect ethical decisions can have. This challenge attempted to show

accountability in a culture of openness. The Challenge was built on

a story line that involved employees in several ethical decision-

making dilemmas aboard a hypothetical space station of the future.

Employees were required to make decisions and experience the

consequences, with the decisions complicated by business pressures,

loyalties and friendships. To encourage employees to be ethical

throughout the year, the Web-based training was given in sets of three

20-minute segments instead of a one-hour block, as it was in the past.

In the most important ethical audit of the year, CEO Phil Condit

asked former Senator Warren B. Rudman to lead an independent

review of the company’s policies and procedures regarding ethics

and the handling of competitive information. Condit announced

Boeing’s intentions to make public the results of his review. “There is

no doubt that our standards of behavior were violated; that is

unacceptable. Boeing has a valued legacy of high ethical standards

and we do not want this hard-earned reputation to be harmed by

the actions of a few,” said Condit at the time of investigation.

The Boeing Rudman report came out on Nov. 3, 2003 and contained

16 recommendations to improve the ethics program at Boeing. The

recommendations encompassed structural issues, hiring and

training, staffing and investigations, and internal oversight. “In our

review, we concluded that Boeing has gone to great lengths to

establish, maintain and continually improve upon an ethics program

that is impressive in its scope and detail,” Senator Rudman said. “We

do not believe that any of the alleged ethics breaches involving

competitors’ proprietary information represent either fundamental

flaws or a systemic failure. Clearly, however, there are areas requiring

improvement and our recommendations address these with the

objective of strengthening the entire program.”

Finally, on Nov. 11, the company established a new Office of Internal

Governance that would report directly to Condit. The office was to

conduct internal audits and monitor ethics and governance. Boeing

Senior Vice President Bonnie W. Soodik was selected to lead the

organization. “Today’s action reflects the full agreement of our

board and our senior management team that the commitment to

these important areas must be set at the very top,” Phil Condit said.

Though huge company-wide efforts had been made, less than two

weeks later Boeing was once again on the ethics alert. The Sears-

Druyun controversy has been revealed to stakeholders and media

and the company who had gone great lengths to make amends is

once again knocked on its back. Despite public relations efforts to

publicize revamped ethical standards, Druyun and Sears have

increased Boeing’s struggle to build and maintain an image of an

ethically responsible corporation. The new issue also jeopardizes the

ability of Boeing to compete for military contracts. The suspension

following the Lockheed Martin case was close to being suspension

for bidding on military contracts (and) was near to being removed

following Boeing’s efforts to enhance ethical practice. Now it

doesn’t look good.

Biographies

Phil Condit: Boeing Chief Executive Officer

Philip (Phil) M. Condit was elected to be the chief executive officer

and chairman of Boeing in 1997. He is the seventh chairman since

the company was founded in 1916. Before holding his current

position, he served Boeing for 30 years in several different capacities.

When he first joined Boeing in 1965, he did so as an aerodynamics

engineer on the Supersonic Transport Program. Although he started

as a regular employee, he quickly moved up the chain of command

to his current position.

Under Condit’s management, Boeing became the largest exporter in

the United States, with revenues of more than $54 billion as of 2002.

.

Large companies rely heavily on the leadership of management and

Condit takes great pride in holding such a prestigious position.

While managing the company’s current finances, he worked to bring

several mergers and acquisitions to Boeing. These mergers are

responsible for taking Boeing from a U.S. company to a major world

leader in the aviation industry. Boeing currently has strong defense,

space, information technology, communications and commercial

airplane programs.

Along with his success as CEO and chairman of Boeing, Condit has

experienced personal success with his own innovations. Condit’s

love for aviation and airplane technology led him to receive his own

pilot’s license at age 18. Because of his personal interest in airplanes,

Condit has written several papers on commercial aircraft technology,

many of which have been published. Condit also holds a patent for

the design of a flexible airplane wing, known as the Sailwing.

While at Boeing, Condit helped launch a new design of 777 Boeing

airplanes featuring a wide-bodied design and integrated the design

team that built the 21st-century jet. To build this jet team, customers,

suppliers and employees were brought to design a product that

would suit the needs of all parties involved. This mission to build a

21st-century jet with a qualified team of experts paid off for Condit.

The team has won several awards including the Collier Award, which

celebrates the success of cooperation and teamwork.

Mike Sears: Boeing Chief Financial Officer

Mike Sears joined Boeing in 1997 when Boeing merged with

McDonnell Douglas, another leader in aerospace technology. Sears

brought to Boeing over 27 years of experience.

Before joining forces with Boeing, he served as president of

McDonnell Douglas for six months prior to their merger. Sears

started his career with McDonnell Douglas as a senior engineer for

avionics technology. One of his major accomplishments while at

McDonnell Douglas was the development and production of the

F/A-18E/F Super Hornet program. This design is now the U.S.

Navy’s front-line strike fighter.

When Sears first joined Boeing, he managed the development and

production of military aircraft and missile systems. While working

with this division for three years, he held the positions of senior vice

president and president. In May 2000, however, Sears turned over his

position as president of the development and production of military

aircraft and missile systems to become the chief financial officer of

The Boeing Company and executive vice president.

Sears had no prior training in finance before becoming CFO. When

it was announced he would be taking over the position, mixed

feelings about the decision circulated among investors and

management officials at Boeing. CEO Phil Condit however, was

confident in his decision to place Sears in the position. Condit

made several statements in an attempt to assure investors and

management. He said, “We have built a team that allows someone

like Mike, with real drive for change, to come in and do that job

without the deep financial background.”

According to analysts and other company officials involved, Sears’

lack of financial background was his only negative downfall. Sears

had an amazing track record in the industry of aerospace technology

and Condit felt this would be his greatest asset to the company. In

another statement, Condit spoke of Sears’ capabilities and the

valuable assets he would bring to the company. He said, “Mike will

add fresh operational thinking to the aggressive target-setting efforts

we have put into place. He also will bring vital strategic thinking to

the corporate office as we pursue growth initiatives.”

Darleen Druyun: Deputy General Manager for Missile Defense

Darleen Druyun joined Boeing on January 3, 2003 to work on the

missile defense program. Prior to her current position with Boeing,

she worked as the principal deputy assistant secretary for the United

States Air Force acquisition and management. Druyun became a

member of the Boeing staff shortly after ending her career with the

Air Force, and her extensive history with the missile program

allowed her to assist with the company’s missile defense program.

Because the government was the major purchaser of Boeing’s

defense products, Druyun had interacted with Boeing officials

regularly in her previous position.

It was believed Druyun’s valuable experience and long history with

the Air Force and her passion for the defense program were key

factors in her acquiring a position at Boeing. One Boeing executive

explained how Druyun was a valuable asset for the company.

“Darleen Druyun helped drive acquisition reform within the Air

Force. Her ‘Lightning Bolt’ initiatives, which jump-started the

reform process, have saved the U.S. Air Force and taxpayers more

than $20 billion to date,” said James Evatt, senior vice president and

general manager of Boeing Missile Defense Systems. “Her personal

passion and drive are well known within the defense industry, and

we expect her to be a key player in our future success.”

Current Situation

Pressure is rising all around Condit as members of the Board of

Directors cast their vote; he wondered how this issue would be

resolved. Reflecting on the events, Condit recalled how Senator John

McCain was the first to raise questions about the tanker proposal. In

July of 2003, McCain alleged that when Boeing was battling to

secure the tanker deal, Druyun improperly gave Boeing details of a

competing bid from Airbus, Boeing’s European rival. McCain

demanded thousands of internal Pentagon documents pertaining to

the tanker deal, which only served to reinforce his opposition on

the project.

.

As McCain began raising questions and concerns in Washington,

Boeing implemented their own investigation of the deal. Early in

November, the investigation produced compelling evidence showing

that not only did Sears and Druyun behave inappropriately, but they

took great measures to conceal their actions. The investigation also

revealed a possible third party. Druyun’s daughter Heather McKee,

who works for Boeing’s military division in St. Louis, may have been

involved in inappropriate actions as well. McKee reportedly

communicated with Sears last year about her mother’s plans to leave

the Air Force and Sears told McKee about possible positions for her

mother at Boeing. Boeing’s internal investigation into this issue is

ongoing. Since the investigation showed that Druyun gave an unfair

advantage in the tanked deal, further investigation may reveal that

she tainted other deals as well.

Secretary Donald Rumsfeld has announced the Pentagon’s

intentions to investigate whether or not to suspend the tanker deal.

“We are the custodian of the taxpayer dollars. We have an obligation

to see that things are done properly,” Rumsfeld said during a

Pentagon press briefing. “Certainly, when something of that nature

occurs, one has to step back and say, ‘What is it we ought to be

thinking as responsible managers of this department?’ “.

These recent events combined with Boeing’s history have made for a

very complicated situation. Any action the board members decide to

take will have multiple side effects, predictable and unpredictable,

controllable and uncontrollable. Steven L. Schooner, an associate

professor with the Government Procurement Law Program at

George Washington University predicted that if Boeing fires Druyun

and Sears it would cause defense companies and officials to question

if the 1980s campaign for higher ethical standards was replaced by a

fight for more flexibility in government contracting.

As this issue has gained public attention, the government has

become increasingly concerned about Boeing trustworthiness. Not

only are they questioning Boeing’s ethical practices but the Pentagon

Inspector General’s Office is investigating communications between

Druyun and Boeing surrounding the tanker deal. In addition, the

Air Force said it “deplores behavior that jeopardizes the integrity of

government procurement activities.” Its statement added the Air

Force may ask an “appropriate authority to investigate the alleged

impropriety.”

After all the Board members’ votes were tallied, the unanimous

decision to fire Sears and Druyun was announced. However, the

Board also knows that firing Sears and Druyun may not be enough

to regain the trust of the government and other key stakeholders.

They may not be so forgiving this time around. In order to preserve

Boeing’s future, Condit will have to take unprecedented measures to

regain stakeholder trust.

Discussion Questions

1. Should Phil Condit also resign? What would be accomplished by

this action?

2. Can Boeing expect to have 100 percent compliance with its ethics

policy? Most of the employees are following the guidelines, but it

only takes a couple of employees to have an enormous impact on

the company’s reputation and relationship with the Pentagon.

3. Other than the Pentagon, who are the key constituents that

should be addressed in this issue? What communication

strategies should be used to repair relationships with these

constituents?

4. How can Boeing do more to increase employee commitment

to ethics?

5. Is it fair to punish a whole company because of the actions of a

few individuals? Does it matter if the individuals are upper

management or line employees?

Chart found at: http://www.economist.com/printedition/displayStory.cfm?Story_ID=2246411

Charts

Year ended December 31 2003 2002 2001

Asia, other than China $6,887 $7,614 $7,112

China 749 1,442 1,504

Europe 3,835 5,871 8,434

Oceania 1,944 1,813 895

Africa 675 525 573

Western Hemisphere,other than the United States 1,271 669 875

15,361 17,934 19,393

United States 35,124 36,127 38,805

Total sales $50,485 $54,061 $58,198

Chart found at: http://www.boeing.com/companyoffices/financial/finreports/annual/03annualreport/f_ncfs_10.html

Source: Thomson Datastream

A bumpy ride Boeing share price, $

1999 2000 01 02 03

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60

50

40

30

20

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Jounghwa Choi, studentFaculty Adviser: Teresa Mastin

College of Communication Arts & ScienceMichigan State University

How Dumplings Became Garbage? 1 The Korea Food and Drug Administration’s Handling of a Food Scare

Introduction

In early June 2004, South Koreans were shocked by news reports that

they had been eating dumplings’ filling made of trashed pickled

radish remnants. All media outlets were reporting on the so-called,

“garbage mandu (dumpling) scandal,” graphically displaying

disgusting pictures of manufacturers processing dumpling filling.

The police were initially in charge of the case, which was eventually

handed over to the Korean Food and Drug Administration (KFDA).

Since such spoiled food cases happen nearly every summer, the

KFDA thought the handling of the dumpling issue was a routine

case. However, tremendous public outcry moved the case from

routine to a situation that placed the entire dumpling industry at

risk. Contrary to initial news reports, it was later revealed that many

companies were accused unjustly and the KFDA had not followed

proper procedures. Once the KFDA’s role in the debacle became

known, opinion shifted against the KFDA. Consumers’ distrust

extended beyond dumplings to governmental agencies and the food

safety as a whole. The primary tasks for the KFDA were helping the

devastated dumpling industry and restoring the public trust.

Background

Organization and functions of the KFDA

The Korea Food and Drug Administration (KFDA) is the

governmental agency responsible for food and drug safety systems in

Korea. Its main functions include surveillance for food

contamination and adulteration, approving of manufactured or

imported drugs and biologics, controlling safety, reviewing standards

and specifications for foods, drugs and medical safety and devices,

and research (KFDA, 2003a). The KFDA acquired the status of

administration under the Ministry of Health & Welfare on February

1998 (KFDA, 2003b). Compared with the Food and Drug

Administration of the United States, the KFDA’s administrative

authority is relatively weak since significant parts of the food-related

administrative tasks are divided among local governments and other

governmental ministries, such as agriculture and forestry, and

maritime affairs and fisheries. About 850 staff (members) work in the

KFDA.

The KFDA consists of a head office, a safety evaluation office, a

national institute of toxicological research, and six regional offices.

The head office consists of General Services Division, Planning &

Management Office, Food Safety Bureau, and Pharmaceutical Safety

Bureau (KFDA, 2003a). Like most of the governmental agencies, the

public information office (PIO) was directly governed under the

commissioner of the agency, but in February 2004, the KFDA

restructured the organization and located PIO under the Planning &

Management Office for the purpose of providing a synergistic effect

by combining the planning and public relations functions

(Hwajanpoom Shinmun, 2004; refer to Appendix 1). However, this

increased the layers of approvals for information release and there

were complaints that timely press releases became difficult

(Sikpoomilbo, 2004).

The chief public information official at that time was assigned to the

position in August 2003. Prior to joining the PIO, he worked for

other management divisions in the KFDA (KFDA, 2003c). Generally,

in Korea, once one becomes a governmental official, he/she moves

across positions within the organization several times during his

tenure. Therefore, usually public information officials are trained on

the job about public relations, rather than having a communication

background. While this rotation system allows officials to gain a

better understanding of diverse organizational functions, in a sense

it hinders specialization. In June 2004, PIO in the KFDA had four

public information officials (The Ministry of Health & Welfare,

2004) and each regional office has one officer who was in charge of

media relations as well as other assignments. With four information

officers, the PIO were producing about 25 press releases per month

on average.2 PIO’s responsibilities include press release writing and

dissemination, communication of public policies, news page

management, briefings, and managing risks (KFDA, 2003d).

.

Dumpling, Consumers and Media

Dumpling (Mandu). Dumpling, called Mandu in Korea, is Koreans’

favorite snack often enjoyed as meals. Mandu is prepared by filling

seasoned minced meat and vegetables inside a flour-based ‘‘skin.’

Dozens of dumpling brands are on the market by big food

companies and small to mid-sized companies who mass produce

frozen dumplings. While big companies have numerous product

lines and dumpling is only a fraction of the sales, small and mid-size

dumping manufacturers depend on the sales of dumplings. “It has

been a growing trend among food companies to invest in the

dumpling business as the market has been experiencing growth over

the past few years” (Korea Herald, 2004a). In addition to the mass

production companies, there are many privately owned dumpling

shops on the streets, which sell their own hand-made dumplings.

“Industry sources estimate that the local market for mandu amounts

to over 300 billion won per year” (Korea Times, 2004).

Consumers. Recently, in Korea, the concept of “well-being,” a trend

toward living a healthier lifestyle has become fashionable. People are

much more interested in health issues and food safety. One of the

driving forces of the well-being wave may be attributed to people’s

concerns about the food safety. Relaxed restrictions on agricultural

produce import increased the circulation of cheap and low-qualify

imported produce in the market, especially from China. Sometimes

imported produce was sold illegally labeled as domestic produce.

The public’s distrust about the government’s ability to supervise

such illegal acts and prevent potential risks increased accordingly. In

this context, the Korean public was sensitive to media reports about

health risks. In the case of the bird flu outbreak in the late 2003,

while experts reported that poultry was safe to eat when fully

cooked, chicken consumption plummeted dramatically. Even, a fried

chicken shop owner committed suicide. Similar results occurred

when the mad cow disease case surfaced. That is, although no mad

cow disease case was reported in Korea, beef consumption decreased

drastically.

Media Practices. In 1989, the prosecutors reported that someinstant noodle manufacturers fried noodles with industrial-use beef oil. The media picked up the story with sensationaltitles. However, it was found not to be true. The alleged oilwas lower grade oil but good enough to use for humanconsumption when purified. After the long court battle, theprosecuting authority ruled not guilty but the leading instantnoodle manufacturer at that time was unable to restore itsreputation even after more than 10 years. A similar caseoccurred in 1998. In this case, the prosecutors reported that aportion of formalin, a 10 percent solution of formaldehyde inwater which is used as a disinfectant or to preserve biologicalspecimens, was found in the canned golbangi (bai-top shell).

The media reported the stories under the title of “cannedgolbangi mixed with formalin” (Hankyoreh 21, 2004a). It waslater reported that formalin can form naturally fromgolbangi. Since these two cases, Korean journalism has beencriticized with as possessing the following characteristics.

• Sensationalism: The media often take up sensationalwords to exaggerate the case. They have been blamed forfostering people’s fears.

• Hot-pot journalism practices: The media flock to the issuefor a short period and turn away from the issue withoutenough follow-up reports.

• Negligence of investigative reporting: Journalists respondto government press releases rather than conductinginvestigation. News reporters rely on government agencies’press releases and do not engage in their own investigationand analysis.

• Practices of scoop competition: Because of harshcompetition for scoops, inaccurate information is oftenreleased.

How the issue unfolded

Pre-Phase

In early March, the National Police Agency was investigating

Euddum Foods, a dumpling filling manufacturer. The police were

suspicious of the hygienic conditions of the dumpling filling

manufacturing process, and found that the company had used the

remnant of pickled radish as filling ingredients. The pickled radish

used was in part imported from China but the company did not

state this on labels. In March, 2004, the police requested an appraisal

of the harmfulness of the dumpling filling from National Institute of

Scientific Investigation (NISI) of Korea and the KFDA separately.

Two types of bacteria were reported (Hankookilbo, 2004).

Meanwhile, in early May, the KFDA inspected several pickled and

dried radish manufacturers, and learned that the police were

investigating Euddum Foods. At this point, the KFDA handed over

the documents collected from other companies and asked the police

to investigate those manufacturers.

Crisis Event

On Sunday, June 6, the National Police Agency issued a public

announcement that local food firms including Euddum Foods made

dumpling filling with rotten ingredients. The police reported that

for five years the companies had supplied spoiled dumpling stuff to

25 dumpling manufacturers including some big food companies

(only the English initial of the name of companies were disclosed).

It was claimed that, to make dumpling filling, the companies used

.

remnants of pickled radishes imported from China, which were

supposed to be trashed (National Police Agency, 2004). The

remnants of pickled radishes were described as ‘garbage’ or ‘trash’

four times in the police press release (Seoul Shinmun, 2004). The

police also provided news reporters with video that contained

pictures of the filling being manufactured in factories.

On the same day, most TV stations reported the story in the evening

news under the title “garbage pickled radish found in dumplings of

famous food firms (KBS)” or “bad dumplings, mass circulated

(MBC).” The news reports showed the pictures received from the

police, which contained images of radish remnants in dirty baskets

on the floor, radish remnants disposal process, and the desalting

process of pickled radishes (Refer to Appendix 2).3 The next

morning, the story was picked up by newspapers. Until that time,

the issue was not advanced as a main story but stigmatized as

“garbage dumplings” scandal. Newspapers used the titles such as

“rotten radish in dumplings” (Seoul Newspaper), “bacteria-mixed

dumplings” (Hankook Daily), “garbage consciences sell garbage

dumpling filling” (Hankyoreh Newspaper), “garbage dumpling

fillings, mass circulated” (Kyunghang Newspaper), etc. While the

police reported that Euddum Foods took 80 percent of market share

in dumpling filling market, it was presented in the media as 80

percent of dumplings in the market used the spoiled dumpling

filling.4

As a result of the vivid television news images, public outcry

increased enormously throughout the next day. For example, people

flocked to dumpling firms’ Web sites demanding that apologies be

made. To the police, media, and the KFDA, there were massive calls

from the public, asking to disclose the name of dumpling

manufactures which used the spoiled dumpling filling. The public

mood can be seen in a quote printed in the newspaper: “this kind of

crime should be accused of murder, not of the food sanitation act,”

some citizen argued (Hankookilbo, 2004b). Consumers also blamed

the government for letting the spoiled dumplings out in the market.

They protested in front of the KFDA head office throwing out

dumplings, and asked the organization to disclosure the name of the

alleged dumpling manufacturers. From that day forward, dumpling

consumption dropped rapidly.

The KFDA’s Initial Reaction

After the police made the first public announcement about the case,

the KFDA informally acquired the documents from the police on

June 7, the day after the first police press release (Hankyoreh

Shinmun, 2004a). Now, the handling of the case and the

investigation were placed in KFDA’s hands. The list of accused

companies, which was made by the police, was based on Euddum

Foods trade records. Therefore, until that time, many of the alleged

companies did not know they were being accused (Hankyoreh

Shinmun, 2004c). It was necessary to confirm facts with the

companies involved but the KFDA hastily posted the list on its Web

site on June 7. Although the KFDA took it off one hour later,

Internet users picked up the information during that hour and it

spread rapidly through personal Web sites. Meanwhile, the KFDA

took off the list because of the pressure by the accused companies.5

(Naeil Shinmun, 2004). As this story spread among Internet users,

they flocked to the KFDA Web site and protested saying “Is the

KFDA the lawyer of dumpling companies (Naeil Shinmun, 2004)?”

At the same time, some of the accused companies, such as

Chewyoungroo, heard the fact that they were accused from the

Internet.

On June 8, the KFDA held a press conference and announced that it

would investigate 25 companies on the list and release the name of

companies after the investigation. In the press conference, Mr.

Chang-Goo Shim, the commissioner of the KFDA, reported that a

revised food sanitation act would be introduced in September at the

earliest, and would include stronger punishments for spoiled food

cases. He added that the KFDA would include dumpling and pickled

radish in the monthly inspection list and enact a food safety law to

response swiftly to the food safety incidents (KFDA, 2004a).

During June 8 and 9, the KFDA committed 38 staff members for

overnight investigations of the 25 companies on the list. Many of the

companies proclaimed their innocence and it seemed more time was

needed to perform the investigations fully. If the list was released

and they were found to be innocent, litigation would follow. It was

also important to protect the public from the spoiled food by

informing people not to buy the substandard products. Therefore,

the decision about the information disclosure was a critical issue.

Meanwhile, because of the shortage of information regarding which

dumpling brands were accused, the stigma of “garbage” were

extending to dumplings as a whole, causing people to avoid even

hand-made dumplings sold in privately-owned shops. The media

also blamed the KFDA for not releasing the information.

Forced by increasing public pressure, on June 10, the KFDA held a

press conference and reported the list of the dumpling manufactures

which were presumed to use the spoiled dumpling stuff produced by

Euddum Foods. At that point, the investigation was not fully

conducted. Mr. Shim, the commissioner, presented the list of 25

companies and urged consumers to watch out for five brands which

were still circulating in the market. In the press release, it was

reported that hand-made dumplings were not related with this

dumpling case (KFDA, 2004b). Mr. Shim noted that the KFDA did

not know about the case before the police announcement. At the

end of the press conference, a consumer activist asked Mr. Shim

“why there is no apology in the press release even though the

public’s outcry is so great like this?” Mr. Shim left the place without

answering the question (Hankyoreh Shinmun, 2004a).

.

On the same day, Mr. Shim visited a TV program to discuss the

dumpling scandal. One of the issues in the discussion was whether

the alleged dumpling filling was harmful to human. For this issue,

Mr. Shim addressed “since there is problem in the hygienic

condition, I judge that there is an issue of harmfulness in this case.”

In advocating the position, Mr. Shim said that “... in this case,

considering the evidence provided by the police and presented on

TV, it seems there is at least the issue of hygiene, clearly...” The

anchor asked Mr. Shim, “Can’t KFDA make its own judgment? Is the

situation such that you have to make judgments from the media?”

Mr. Shim made excuses saying that the KFDA does not engage in

cases that are being investigated by the police and it could not do it

since the police had already seized the necessary documents (MBC,

2004). It appeared that the KFDA was not aware of the details of the

case and simply depended on the information by the police and the

media. On the other hand, other experts argued that it was difficult

to say that the dumplings would be harmful because dumplings are

steamed, boiled or fried before intake. To date, no official cases of

disease caused by dumplings have been reported.

Consumer response to the list disclosure was enormous because

some prestigious companies were included. Consumers’ skepticism

about food safety was widespread. The public attitude was “there is

nothing to eat without doubt” (Kyunghyang Shinmun, 2004b). Some

consumer organizations announced they planned to request

compensation from the companies and the governmental agencies

involved in the case for their civil and criminal responsibility

(Segyeilbo, 2004).

From June 11 to 15, follow-up investigations were conducted by the

KFDA. As a result of the investigation, it was found that 14 out of 25

companies were innocent. On June 14, an owner of small dumpling

company committed suicide. In his suicide note, he claimed his

innocence and criticized the government’s problematic food system

management (Kyunghyang Shinmun, 2004c). Moreover, for many of

companies the KFDA alleged to be guilty, local governments ruled

that it was unfair to place administrative measures on those

companies because no proof for the harmfulness of the dumplings

was found (YTN, 2004). These events provided a turning point

regarding the issue. Now the blame shifted from the business to the

police, the KFDA, and the media, with the bulk of the blame on the

KFDA because it was believed that food-related issues are ultimately

within the KFDA’s responsibility. The KFDA was accused of

conducting the investigation in a rough and ready way. The media

was also blamed for making sensational and inaccurate reports.

Communication Problems in the KFDA’s handling

As behind-the-scene-stories began to be disclosed, many

communication issues arose.

Communication breakdown with the police

The police argued that two types of bacteria were found in the

dumpling filling by National Institute of Scientific Investigation of

Korea (NISI). The police also reported that the other government-

affiliated research institute told that the products containing those

bacteria are not eatable (Hankookilbo, 2004c). Later it was revealed

that in the police report, the NISI raised the possibility that the

sample of dumpling filling was contaminated by the process of

picking and delivering the evidence (Hankookilbo, 2004c). However,

the information was not shared with the KFDA, contributing to

KFDA’s misjudgment of the situation. Also, it turned out that

neither the KFDA nor the police communicated with each other

after the police took charge of the case.

Failed to shape accurate perception about the issue

While the critical point in this case was whether the remnant of

pickled radish was real garbage or edible food material, the KFDA

was not actively involved in shaping accurate perception about this

issue. In the initial police report, the remnants itself were described

as garbage and the media simply picked it up. In people’s

consciousnesses, pickled radish remnants was perceived as garbage

that should be trashed. However, it was found that the use of

remnants from the process of pickling radish is legally allowed by

the KFDA and even the technique was patented (Ddanjiilbo, 2004).

Also, it was later learned that when the KFDA inspected the sample

of dumpling filling in March, as the police requested, it concluded

that the bacteria found were non-disease-causing germs or has little

potential to cause disease, because those bacteria die when

dumplings are cooked with heat over a certain temperature

(Hankookilbo, 2004c). Further more, bacteria inspection had not

been required in the hygiene inspection for dumpling filling because

it is meaningless in the fact that dumpling filling undergoes several

processes such as boiling (Donga.com, 2004b). While the KFDA had

insisted that the case is about hygienic problems, it was unclear what

was meant by ‘hygienic.’

With the lack of information, lay people held inaccurate perceptions

about the issue. According to a national survey conducted by

Hankyoreh newspaper on June 12, the majority of the people, 64.3

percent, believed that ‘the dumpling scandal was caused because

some food firms used trashed remnants of pickled radish to make

dumpling filling.’ Only 32.2 percent answered that ‘some food firms

used remnants of pickled radish in unhygienic way to make

dumpling filling,’ which is more in line with the truth.

.

Denying and excuses

From the beginning, the KFDA consistently argued that it did not

know about the case before the police announcement. However, this

claim was refuted by the police. The police argued that the “the

KFDA knew about the case because it conducted crackdowns on

remnants of pickled radish in 2001 and 2003” and “we asked the

KFDA to accompany when we went out for investigations on March

9, but the KFDA refused it” (Hankyoreh 21, 2004b). In fact, it was

found that the police had asked the KFDA to inspect the sample of

dumpling filling in March (Hankookilbo, 2004c) and the KFDA

knew that the police were investigating Euddum Foods in May. As

for this allegation, a KFDA officer made an excuse saying that he

thought that the police’s investigation was about imported foods,

not about dumplings (Kyunghyang Shinmun, 2004a). In addition, it

also became known that KFDA regional offices had asked the local

government to take administrative measures on three separate

occasions regarding Euddum Foods. However, the head office did

not take any further action. As these details were disclosed, KDFA

appeared to be lying, neglecting, and denying its responsibilities.

Failed to be a reliable and responsibleinformation source

While there were many issues regarding KFDA’s mishandlings,

minimal official comments were available from the KFDA, which led

the media to rely on informal sources. For example, the KFDA did

not responded to the reporters’ question about whether it knew

about the reports on Euddum Foods by regional offices. As a result,

what has been quoted in the newspaper were unofficial comments

such as; “It is uneasy for me to confirm the facts. Please, don’t ask

me any more (by a high official of KFDA),” or “It was a normal case.

We did not expect the case would become serious like this, so that

we did not take any action” (Kyunghyang, 2004d). The impression

from these quotes might be that the KFDA was hiding something or

irresponsible. Also, as many facts turn out to be different from what

the KFDA argued, public trust in the KFDA as an information

source decreased.

As the KFDA failed to communicate in an accurate and appropriate

manner, public opinion toward the KFDA became increasingly

negative. According to an opinion poll on June 12, only 11 percent of

the sample answered that they trust the governmental agencies

which are responsible for the food safety. About 62 percent of the

participants answered that foods are ‘not safe to eat’ while 11 percent

answered ‘safe.’

Ripple Impacts of Dumpling Scandals

During the crisis, the KFDA did not take an active role. The case

caused significant social impacts, including direct impacts on the

accused companies as well as an indirect ripple effect on the

society at large.

Impacts on dumpling industry: All small and mid-sized dumpling

manufactures fell into severe financial crisis. To the big food

companies, dumpling is just a fraction of their business but to small

and mid-sized companies, it is their entire business. Public distrust was

extremely high; the turnover of the dumpling industry production was

just at the level of 10 percent of the normal level a month after the

initial event. Some dumplings companies went into default and

hundreds of employees lost their job (Dongailbo, 2004). For other

companies, recent active investments on the facilities became

burdens, because, without sales, paying the interest on bank loans

was impossible. Also, small restaurant businesses that sell their own

hand-made dumpling were severely harmed. The companies, which

were not involved in this scandal, also had difficulties, as consumers

asked for refunds and traders cancelled orders. (Refer to Appendix 4)

Impact on other industries: Not only dumpling manufactures, (but)

related industries, i.e. farmers who supply meat and vegetables for

dumpling, pickled radish manufacturers, frozen food industries,

were also affected.

International relationships: The issue went beyond a domestic issue.

On June 9, Japan, the largest importer of Korean dumplings,

imposed a ban on the import of Korean dumplings. Although the

ban was receded on June 22, the dumpling scandal also became a big

issue in Japan and left a bad image about Korean foods in the minds

of the Japanese (KBS, 2004). Following Japan’s example, subsequently

other countries, (including) United States, Australia, and South

Asian countries, also banned the import of Korean dumplings. It can

be said that the dumpling spoiled Korea’s image across the globe.

Being Responsible or Blame-Shifting?

On June 15, in a meeting for an operational report to congressmen,

Mr. Shim, the commissioner of the KFDA, admitted that the

investigation of the dumpling case was conducted in a hasty manner

because of the public pressure. He also admitted that the KFDA

should not have released the list until the investigation had been

completed (Hankookilbo, 2004d). It was the first time that the KFDA

admitted its mistakes, but it was not done in the form of public

announcement or apologies to the public. Meanwhile, according to a

local newspaper on June 18, the KFDA said there had been and was

nothing wrong with its way of conducting the investigation. An

official, who declined to give his name, at the KFDA’s food

management department, explained that “we have been doing our

best, and the two companies that have been cleared is not a result of

being careless; they were on our list of companies, which we believe

needed additional probing” (Korea Herald, 2004b)

Meanwhile, on July 12, the KFDA announced that from June 12 to

July 6, the KFDA conducted a national special sanitation inspection

on manufacturers of dumplings, dumpling filling, and pickled

radish. In the press release, the KFDA assured that it is okay to buy

dumplings and told that it would do its best to help the dumpling

.

industry to restore their business (KFDA, 2004c). On July 13, the

KFDA and the Ministry of Health & Welfare placed a one-third-page

newspaper advertising to promote dumpling consumption

(Appendix 3).

On July 15, a column by KFDA Commissioner Shim, appeared in a

newspaper. In the column, he addressed that “previous food safety

accidents were amplified by the non-expert organization’s hasty

announcement and media’s exaggeration” (Seoul Kyungje, 2004). On

the same day, another column by another KFDA official appeared in

another newspaper. He apologized for not preventing the scandal

and argued that “there was a misunderstanding that the KFDA

hastily announced the list of the accused companies and resulted in

damages on those companies.” He explained that “the frustrated

public forced the KFDA to release the list” and, “regardless of the

public’s frustration, the KFDA released the list to take its

responsibility of preventing circulation of the spoiled dumpling”

(Hankyoreh Shinmun, 2004d). Responses to these columns were

cold. In response to Commissioner Shim’s column, a newspaper

noted that the KFDA was shifting its blame to the media and the

public (Kyunghyang, 2004e). Some Internet users also responded

negatively to the columns and advertising, saying that the KFDA was

attributing the responsibility to public misunderstanding.6

In early July, eight small and mid-size dumpling companies formed

the Korea Dumpling Producers Association to collectively file a

compensation claim against major media and government bodies –

namely, the National Police Agency and the Korea Food and Drug

Administration. Because of tremendous loss of public trust, it

seemed there would be a long way for the KFDA to go to rebuild

trust with the public, media, and companies.

Problem Questions

1. Should the KFDA have released the list of the companies before

its investigation had been completed? How should such decisions

about the information disclosure be made? How can one balance

between the public’s right to know and potential damage of the

companies?

2. How had the issue been amplified? What were the factors which

contributed to the amplification process? What is the significance

of effective communication in the issue amplification process?

What kind of precautions should be taken to deal with such

media environment?

3. Think about the barriers of effective communication in the public

sector, especially when it involves other governmental agencies.

4. How would you evaluate the KFDA’s media relations? How was

the relationship between reporters and the public information

officer?

5. What was the status of the public information office in the

organization? What were the organizational factors which might

have an influence on the effectiveness of communications?

6. Considering the constraints, how could the KFDA actively have

dealt with the post-crisis situation? What kind of information

and strategies might be necessary to assure the public and

minimize the damage of the innocent companies? If you were the

chief official of the public information office, what would you do

at this point?

Post-script

Before the scars from the dumpling scandal had been healed,

another public relations fiasco erupted involving the KFDA. On July

31, the KFDA disseminated a press release. It was about prohibition

of sales of cold medicine containing phenylpropanolamine (PPA).

Since many cold medicines with PPA had been commonly taken

without prescription and the issue was directly related to public

health, it was an important issue which needed to be handled

carefully. Although the prohibition of drugs is wholly KFDA’s

responsibility, it was necessary to report the Ministry of Health &

Welfare, the upper governmental administration, to minimize

potential public confusion or inconvenience. However, the new chief

official of PIO, who was the chief official of general affair division in

a regional office, had been assigned just a week earlier and none of

the staff in PIO including the chief recognized the importance of the

case. So, the information was released without discussing the matter

with the upper Ministry (The Ministry of Health & Welfare, 2004).

Moreover, the press release was handled in an unprofessional

manner. First, the press release was disseminated by e-mail on

Saturday which is not a business day for the most newspapers. There

was no pre-notification about the press release, briefing, or

supplemental information. After sending the e-mail, the staff of PIO

made calls to confirm whether reporters received the message, but

only 14 out of 25 were contacted (The Ministry of Health & Welfare,

2004). This mishandling led the media to suspect that the KFDA

intentionally delayed the announcement and released the press

release on Saturday to reduce the impact of the case on behalf of the

pharmaceutical companies. The suspicion came from the fact that

the research to investigate the harmfulness of PPA had been funded

by pharmaceutical companies. Furthermore, these types of

medicines had been banned in the United States since November

2000 (KDFA, 2004d).

Pharmaceutical companies were also frustrated with how theKFDA dealt with the case. Although 70 percent of theproducts, which were prohibited, were already off the market,the KFDA simply provided the whole list containing thename of 167 products without asking the firms to distinguishthem (Dailypharm, 2004). Consequently, for consumers, itwas confusing to tell which ones were prohibited. In addition,the decision should also have been delivered to many otherorganizations, such as local governments, consumerorganizations, pharmaceutical associations, and hospitalassociations. However, because of an electronic systemmalfunction, most of the organizations did not learn about

.

Appendix 1. Organization Chart

Appendix 2. Pictures from TV news reports

Source: The Korea Food and Drug Administration

Reported in thebroadcasting

“Here is a factory of pickledradish manufacturer in PajuCity in Kyung-gi Province.

On the ground, there areboxes which contain radishremnant from radish picklingprocess.”

“Dumplings made of badfilling went into the mouths ofconsumers through discountshops and restaurantschains.”

“The local government, PajuCity, uncovered this dumplingfilling made of garbage, butonly imposed a fine.”

Report Classification

“This is not the material fordumpling filling. They tookthe picture of garbage on theground.”

“This is not bad dumplingfilling but trash.”

“This is the process ofdesalting. Since air bubblesare rising, the water looksdirty but it is clean waterwhich is purified andsterilized.”

Source: Donga.com (Jun. 18,, 2004)

The Commissioner

The Vice Commissioner

Planning & Management Office• Planning & Budget Office• Innovation Management Office• International Trade and Legal

Affairs Office• Public Information Office

Customer Support

Regional KFDA• Seoul• Busan• Gyeong-in• Daegu• Gwangju• Daejeon

Pharmaceutical Safety Bureau

Food Safety Bureau

General Services Division

Audit & Inspection Office

Safety Evaluation Office

National Institute ofToxicological research

.

the decision until after August 2 (The Ministry of Health &Welfare, 2004).

As a matter of fact, the KFDA received the final report of the research

one month before the press release. This was a relatively quick

decision compared to the United States’ and the study conducted in

the United States was also funded by the pharmaceutical companies

(KDFA, 2004e). Therefore it would be fair to say that KFDA’s

mishandling of public relations created a great deal of attention and

aggravated the relationship with the media as it was so close of the

heels of the dumpling filling scandal. The public followed the

negative stories and criticized the KFDA strongly. The drug and the

dumpling filling cases led to Commissioner Shim’s resignation on

August 9 (Hankyoreh Shinmun, 2004e).

Going through the dumpling scandal and PPA sandal, the weakness

of public relations function in the KFDA was exposed and

recognized. The Ministry of Health & Welfare ordered the KFDA to

reinforce human resources in PIO and the KFDA assigned two more

staff (members) to PIO, now having six staff (members) (at the date

of Dec. 31, 2004). The KFDA also developed new policies for

effective public relations: establishing that public relations manage-

ment system that includes the chief of bureau, the director, the vice

commissioner, and PIO officers participate; holding a briefing

session before releasing the information (Shikpoomilbo, 2004). On

the other hand, these scandals made the public realize the role of the

KFDA and experts argued that the food safety systems should be

centralized in the KFDA, with more budget and human resources.

The dumpling scandal news reports were recorded as one of top 10

worst reports of the year in Korea (Hankyoreh Shinmun, 2004f).

Source: Chosun Daily Newspaper (Jul. 13, 2004)

Appendix 3. Advertising by the KFDA and the Ministry of Health & Welfare

Now you can eat dumplings without concern.

• We examined the hygienic and managerial condition of all dumplingmanufactures. (2004.6.12-7.6)

Uncovered 28 companies out of 297 and ordered correction or askedadministrative measures.

• We conducted an inspection on dumplings on the circulation. (2004.6.12-7.6)

For two items out of 542, which were below the standards, we orderedproduction suspension and exhaustion.

• From now, we will exhaustively supervise dumplings.

We will conduct the inspection on dumpling every month.

We will conduct the inspection on manufactures every quarter, cooperating withlocal governments.

From now, we will try to keep food safety with modesty and sincerity.

.

Appendix 4. Dumpling Sale Trend in the Discount Shop*Assuming the sales before the scandal is 100,

Source: Chosun Daily Newspaper (Aug. 9, 2004)

15

2529

June 7–13 June 14–20 June 21–27 June 28–July 4 July 4–11

0% 0%

Appendix 5. Dumpling Scandal Time Line

February 22 The police found clues for bad dumpling in Euddum food company.

May 4–7 The KFDA conducted inspections on pickled radish and dried sliceradish manufacturers.

May 19 The KFDA asked the police to investigate those manufacturers.

May 19/20 The police filmed the factories of pickled radish manufacturers.

June 6 The police briefed the media about the dumpling scandal.

June 9 The Japanese government announced a ban on import of Koreandumplings.

June 10 The KFDA announced the list of the accused dumpling manufacturers.

June 13 The owner of Vision Food committed a suicide.

June 15 The commissioner of KFDA admitted mistakes in the investigation.

June 23 Five food companies were cleared of suspicion.

July 7 The Korea Dumpling Producers Association filed a suit to the PressArbitration Commission against three broadcasting companiesrequiring they make report corrections.

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Hankyoreh Shinmun (2004d, July 15). Mandu Upgae Taguk Antakkaum Koe [Feelgreatly sorry for the devastated dumpling industry]. Retrieved January 8, 2005, fromhttp://www.hani.co.kr/section-001042000/2004/07/001042000200407151645237.html

Hankyoreh Shinmun (2004e, Augist 9). Shim Chang Gu Sikyakcheongjang Saim [ShimChang Gu, the commissioner of KFDA regined]. Retrieved January 8, 2005, fromhttp://www.hani.co.kr/section-005000000/2004/08/005000000200408090955001.html

Hankyoreh Shinmun (2004f, December 29). Allhaeyui Nappun Bodo 10gajinun? [10 badreporting in this year?]. Retrieved January 8, 2005, from http://www.hani.co.kr/section-001037000/2004/12/001037000200412291510001.html

Hwajangpoom Shinmun (2004, February 6). Shikpoom Euyakpoom Anjeoncheongdaedaejuk jojik gaepeon[The Korea Food and Drug Administration, reorganized inlarge scale], Retrieved January 8, 2004, from http://www.hjp.co.kr/.

KBS (2004, June 18). ShinkangKyun-eui Sasileun: Suregi mandueui Sasileun [Shin KangKyun’s ‘the truth is...’; The truth of garbage dumpling is...], Retrieved January 7, 2005,from http://www.imbc.com/

The Korea Food and Drug Administration (KFDA). (2003a). Main Function. RetrievedJanuary 8, 2005, from http://www.kfda.go.kr.

The Korea Food and Drug Administration (KFDA). (2003b). History and Purpose.Retrieved January 8, 2005, from http://www.kfda.go.kr.

The Korea Food and Drug Administration (KFDA). (2003c). Insa Dongjeung [PersonnelMovement]. Retrieved January 8, 2005, from http://www.kfda.go.kr.

The Korea Food and Drug Administration (KFDA). (2004a, June 8). Jaturi MurulSayonghan Mandu Jejoupso Jochi, Bodo Jaryo [Measures on the dumplingmanufacturers which used radish remnant: Press Release]. Retrieved January 8, 2005,from http://www.kfda.go.kr.

The Korea Food and Drug Administration (KFDA). (2004b, June 10). BulrayangMumallangi Sayong Mandu Jejoupso Jumgumgeolgwa Mit Jochi [The results ofinvestigation on dumpling manufacturers which used bad dried slices of radish andmeasures]. Retrieved January 8, 2005, from http://www.kfda.go.kr.

The Korea Food and Drug Administration (KFDA). (2003d). Kihweck Kwanri kwa[Planning & Management Office]. Retrieved January 8, 2005, fromhttp://www.kfda.go.kr.

The Korean Food and Drug Administration (KFDA). (2004c, July 12). Anjunhan ManduJepoom Youtoneul Yuihan Jochi Gyulkwa [Result of inspection for safe dumplingcirculation]. Retrieved January 8, 2005, from http://www.kfda.go.kr.

The Korean Food and Drug Administration (KFDA). (2004d, July 12).Phenylpropanolamine (PPA) Hamyou Gamkiyak Sayongjungjwa Kwanryeonhayeo-2[About the prohibition of cold medicine containing Phenylpropanolamine (PPA)].Retrieved January 8, 2005, from http://www.kfda.go.kr.

The Korean Food and Drug Administration (KFDA). (2004e, July 12).Phenylpropanolamine (PPA) Sungbun Hamyou Gamkiyak Kwanryeon UnronbodoeDaehayeo [Corresponding to the media reports about cold medicine containingPhenylpropanolamine (PPA)]. Retrieved January 8, 2005, from http://www.kfda.go.kr.

The Korea Herald. (2004a, July 15). Dumpling makers struggle to revive market.Retrieved January 8, 2005, from http://www.kinds.or.kr.

The Korea Herald. (2004b, June 18). Dumpling companies try to save reputation.Retrieved January 8, 2005, from http://www.kinds.or.kr.

The Korea Times. (2004, June 17). Dumpling promotion drive launched. RetrievedJanuary 8, 2005, from http://www.kinds.or.kr.

Kyunghyang Shinmun (2004a, February 11). Kyungchal Susa Balpyotekaji 4neyon6gaewolgan Sikyakcheong ‘Bulrayang Mandu’ Mollatta [The KFDA did not know aboutthe bad dumpling until the police’s report]. Retrieved January 7, 2005, fromhttp://www.kinds.or.kr.

Kyunghyang Shinmun (2004b, June 11). Gagongsikpoom Jyeda Suregiro Boyeoyo: IttaraTeojin Bulryang Mukgeori Simindul Buntong [All mass produced foods look likegarbage: Citizens’ outcry rush out because of successive spoiled food scandal] RetrievedJanuary 7, 2005, from http://www.kinds.or.kr..

Kyunghyang Shinmun (2004c, June 14). Vision Food Daepyo Jungbu Binan YouseoPajang [A suicide note by the owner of Vision Food, which blamed the government,ripples]. Retrieved January 7, 2005, from http://www.kinds.or.kr.

Kyunghyang Shinmun (2004d, June 12). Jibangcheong Bulryang Manduso Jukbal 3chareiBogo, Sikyakchung Bulil Anida Muksal [The KFDA ignored regional offices’ reportsabout the bad dumpling filling three times]. Retrieved January 7, 2005, fromhttp://www.kinds.or.kr.

Kyunghyang Shinmun (2004e, July 16). Kija Memo: Unron Tatman HanunSikyakchungjang [Reporter Memo: The KFDA commissioners only attribute the blameto the media]. Retrieved January 7, 2005, from http://www.kinds.or.kr.

MBC (2004, June 10). 100bun Toron: Suregi Mandu Padong, Daechaekun? [100 minutediscussion: Garbage dumpling scandal, what’s the counter plans?]. Retrieved January 8,2005, from http://www.imbc.com.

The Ministry of Health & Welfare. (2004, August 9). Shikpoom EuyakpoomAnjeoncheong Kamsa Keolkwa: Bodo Jaryo [Press Release: The result of audit on theKorea Food and Drug Administration: Press Release]. Retrieved January 8, 2004, fromhttp://www.mohw.go.kr/index.jsp.

Munhwailbo (2004, June 8). Suregi Mandu Hwoesa Balkyeora: Simindul SikyakcheongUpchae Homepageyeh Hangyuigul Swoedo [Disclose garbage dumpling manufacturers:Citizens’s protests rush into the Website of the KFDA and the manufacturers]. RetrievedJanuary 8, 2005, from http://www.kfda.go.kr.

Nail Shinmun (2004, June 10). Ppunhi Algodo Motsunda [Can’t write the truthsnotwithstanding knowing the truths]. Retrieved January 8, 2005, fromhttp://www.kfda.go.kr.

The National Police Agency. (2004, June 7). Boerejinun Jungguksan Danmuji JatturirulSugoehayoe Pewumulro Talyeon Seichuckhayoe Mandu dung Jaeryoro NappumhaewonUpja 6myung Impgun, Bodojaryo. [The police booked six manufacturers who suppliedfood material made of remnant of pickled radish which were supposed to be trashed,Press Release]. Retrieved January 8, 2005, from http://www.police.go.kr/

Segyeilbo (2004, June. 12). Bulryang Mandu Jipdan Jeso Chujin [Consumers arepreparing a compensational claim to bad dumpling manufacturers]. Retrieved January7, 2005, from http://www.kinds.or.kr.

Seoul Shinmun (2004, June 18). ‘Seuraygi Mandu’ Pyohyun Wae Nawanna [Where didthe expression of ‘garbage dumpling’ come from?]. Retrieved January 7, 2005, fromhttp://www.hjp.co.kr.

Seoul Kyungje Shinmun (2004). Mandu Kudetarul Yuihan Jeun, Shim Chang KuSikyakchungjang [Suggestions for a dumpling coup d’etat by KFDA commissioner,Shim Chang Gu]. Retrieved January 7, 2005, from http://www.hjp.co.kr.

Shikpoomilbo (2004, August 20). Sikyakcheong Gonbo kineung Kanghwa PilyoseungDaedu [KFDA, the necessity to enforce public relations function arise], RetrievedJanuary 8, 2005, http://www.dailyf.net/main/content.asp?idx=34970

Sikpoomeumryo Shinmun. (2004, June 16). Bansonsa Danmuji Hwamyeon JinwuiNonran [Controversials around broadcasting films taking pickled radish]. RetrievedJanuary 8, 2005, from http://thinkfood.co.kr/view.html?no=28943

YTN (2004, August 12). Bulryang Mandu Muhyumeui Sokchul. [Alleged companieswith bad dumpling are cleared of suspicion]. Retrieved January 8, 2005, fromhttp://search.ytn.co.kr/search_view.php?m_cd=0103&jkey=200408120735011782

ENDNOTES

1. This case was written for class discussion and based on publicly availableinformation, such as newspaper articles, press releases and messages in the Internetbulletin boards. Therefore, at some points, the case described here may not agreewith the KFDA’s perspectives or position.

2. It is the 2004 average. The press releases produced by regional office were notcounted in this number.

3. Later, it was argued by the manufacturers that the pictures taken by the police werethe images of real garbage and TV news used the images taken by the police. Also,they argued that the processes which appear unhygienic in the pictures were thecharacteristics of the process which is in fact hygienic. Responding tomanufacturers’ refutation, the reporters argued that they used their own film as wellas the films taken by the police (Donga.com, 2004a).

4. It was found that dumplings affected by the alleged dumpling filling was less than10 percent of the total market because many kinds of dumpling do not use pickedradish as ingredient (Ddangiilbo, 2004).

5. As for this happening, KFDA argued that it was a mistake by a PIO officer(Munhwailbo, 2004).

6. Comments from Internet users were searched from the bulletin boards in theOmbudsman of Korea and Kyunghyang Newspaper.

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Diamond ($10,000+)Allstate Insurance CompanyJohnson & JohnsonUPS

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We are grateful to the following companies and individuals for their generous support:

OFFICERS

PresidentThomas R. Martin

ITT Industries

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Eaton Corporation

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Fleishman-Hillard, Inc.

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TRUSTEES

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Executive DirectorPaul Basista, CAE

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Arthur W. Page viewed public relations as the art ofdeveloping, understanding and communicating character –both corporate and individual.

This vision was a natural outgrowth of his belief inhumanism and freedom as America’s guiding characteristicsand as preconditions for capitalism.

The successful corporation, Page believed, must shape itscharacter in concert with the nation’s. It must operate in thepublic interest, manage for the long run and make customersatisfaction its primary goal. He described the dynamic this way:

“Real success, both for big business and the public, lies inlarge enterprise conducting itself in the public interest and insuch a way that the public will give it sufficient freedom toserve effectively.”

• Tell the truth. Let the public know what’s happening andprovide an accurate picture of the company’s character, idealsand practices.

• Prove it with action. Public perception of an organizationis determined 90 percent by what it does and ten percent bywhat it says.

• Listen to the customer. To serve the company well,understand what the public wants and needs. Keep topdecision makers and other employees informed about publicreaction to company products, policies and practices.

• Manage for tomorrow. Anticipate public reaction andeliminate practices that create difficulties. Generate goodwill.

• Realize a company’s true character is expressed by its people.The strongest opinions – good or bad – about a company areshaped by the words and deeds of its employees. As a result,every employee – active or retired – is involved with publicrelations. It is the responsibility of corporatecommunications to support each employee’s capability anddesire to be an honest, knowledgeable ambassador tocustomers, friends, shareowners and public officials.

• Conduct public relations as if the entire company dependson it. Corporate relations is a management function. Nocorporate strategy should be implemented withoutconsidering its impact on the public. The public relationsprofessional is a policymaker capable of handling a widerange of corporate communications activities.

• Remain calm, patient and good-humored. Lay thegroundwork for public relations miracles with consistent andreasoned attention to information and contacts. When acrisis arises, remember that cool heads communicate best.

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