Page 1 of 28 ANZAM 2010 Managing Athlete Spokesperson Risk in Times of Crisis: Lessons learnt from the Michael Phelps & Tiger Woods cases Lauren Sedgman School of Economics and Business, the University of Sydney, Australia Email: [email protected] ABSTRACT: Sponsorship is the fastest growing form of advertising by consumer firms, representing a total of US$44 billion worldwide forecasted to grow by 4.5% in 2010 (IEG, 2010). The increase in sponsorship by consumer firms necessitates a corresponding increase in risk management policies to guard against the potential damage of negative spokespeople events to shareholders. This paper examines flaws in existing risk management practices and the detrimental impact of negative spokesperson events on the firms sponsoring both Michael Phelps and Tiger Woods. This paper offers lessons for managers seeking to reduce the uncertainty associated with the management of multi-brand athlete properties in times of crisis. Key words: Managing Uncertainty, Marketing and Communication, Intangible Assets, Risk Management, ANZAM 2010 Page 2 of 28 ANZAM 2010 Conference Paper MANAGING ATHLETE PROPERTIES INTRODUCTION Growth of Sponsorship and Athlete Behaviour It has been said that “managers face uncertainty, and investors face risk” (Sull, 2006). Since the behavior of athlete properties is highly uncertain, managers of firms employing intangible assets such as athlete properties face significant uncertainty. Sponsorship is the fastest growing form of advertising by consumer firms, representing a total of US$44 billion worldwide forecasted to grow by 4.5% in 2010 (IEG, 2010). The increase in sponsorship funding necessitates a corresponding improvement in risk management policies to guard against the potential damage of negative spokespeople events. Negative spokespeople events for the purpose of this paper are defined as any behavior or activity involving the company spokesperson that contributes poorly to public opinion, whether as a result of their direct actions or indirect involvement. Recognizing these considerable risks to consumer brand equity, firms must be able to adapt, pre-empt or absorb spokesperson risk. Negative Spokespeople Events and Potential Damage to Firm Reputation Managers must address the risk management deficit in the supervision of sports properties to protect the financial position of the firm and its shareholders. By undermining reputation value, negative spokespeople events can destroy shareholder wealth, brand equity, and earnings potential (Knapp, 1999). In the month following Tiger Woods’ scandal, shareholders of his sponsored firms lost an estimated US $12.37 million following revelations of his extra marital affairs (Knittel and Stango, 2009). Reduced brand equity has further negative financial effects and can increase the debt-holder risk the cost of capital to the firm (Rego et al., 2009). By reducing spokesperson risk and protecting brand equity the firm can reduce its exposure debt-holder risk and the cost of capital. Athlete properties Athlete or sports properties refer to the brand equity inherent in the performance and popularity of an athlete or sporting organisation. Firms seek to employ sports properties to leverage the positive value of this brand with their corporate brand. A corporate brand is a “declaration of what it is and what it 1 Page 3 of 28 ANZAM 2010 believes” (Knapp, 1999). Brand equity by extension refers to the value that the company’s name, vision and actions extracts from the consumer or the economic value “beyond the physical assets associated with its manufacture or provision” (Aker and Biel, 1993). Thus, “every corporate action sends a message that either reinforces the brand and releases earning power, or misdirects it and invites earnings risk” (Knapp, 1999). Logic for Engaging Athlete Properties Athletic spokespeople add value if managed correctly. This paper will argue that as with any other alliance it is the firm’s responsibility to manage this alliance of brands (firm & athlete) to reduce reputational risk, in this case due to negative spokespeople events. Furthermore, this paper will identify the existing flaws in the current application of risk management policies to sponsorship assets; including the overreliance upon athlete agents and the corporate attitude that spokesperson risk is a necessary ‘cost of doing business’. By addressing the unsystematic risk of negative spokespeople events, this paper highlights important considerations for firms sharing an athlete property to minimise the uncertainty. This supports the manager’s main responsibility of protecting and maintaining shareholder value. Positive Impact of Sponsorship on Consumer Behaviour Consumers are affected by a multitude of factors when making the purchasing decision. Considerations such as price, quality, and utility are obvious factors, but consumers are further impacted by the opinions of influentials or “individuals who influence an exceptional number of their peers” (Dodds and Watts, 2007). Athlete properties have a powerful influence on potential consumers as a result of their ‘star quality’ and in turn, purchasing decisions. Yet, cascades of influence are driven not solely by “stars” or “influentials”, but also a critical mass of easily influenced individuals (Dodds and Watts, 2007). Thus it is a combination of “opinion leaders” and these easily influenced individuals who form and impact public opinion (Dodds and Watts, 2007). Athlete properties or spokespeople are important influentials in communicating the corporate message, and their actions positive and negative respectively release and destroy earning power. Negative spokespeople events interrupt the brand message and consequently affect how the consumer interprets the brand. 2 ANZAM 2010 Page 4 of 28 LITERATURE REVIEW Evolution of Sponsorship: From Endorsements to Athlete Properties The 1960s model of athletic sponsorship primarily took the form of direct advertising, product placement or endorsements. Zygman (2001) sees an important distinction between endorsements and spokespeople with the former giving credibility to the product as they are users of it, whereas spokespeople vouch but may not use the product. Firms focused on developing a cause and effect relationship with consumers by connecting perceptions of product quality with successful athletes. For example, the firm’s products gained credibility and legitimacy with consumers by virtue of the fact they were used by the world’s best athletes. In the 1970s athletic sponsorship developed beyond implied causal links into the patronage of high performance athletes, furthered by televised broadcasting of popular sporting matches (Black, 2010). The impact of star players increased TV ratings and game attendance (Hausman and Leonard, 1997). By the 1980s athletic sponsorship became a key marketing strategy for large multinationals. However, it remained an experimental investment that was not pursued by many mid-tier consumer firms as the benefits of sponsorship were not proven (Amis and Cornwell, 2005). Competing perspectives on the Sponsorship relationship. Critics of the sponsorship relationship suggest that whilst they are an important communication method, they lack a synergy between partners which in turn undermines the return on investment (Zygman, 2001). In particular Zygman (2001) finds traditional philanthropic connotations render the relationship a one- sided and exploitative financial arrangement. Competing perspectives suggest that sponsorships if managed successfully can generate a competitive advantage and apply the resource based view to find that sponsorship releases above average returns in market share and profitability (Fahy et al., 2002). The potential marketing value of sport sponsorship is considerable “if treated as a potentially valuable resource- with the appropriate consideration given to heterogeneous distribution, inimitability, lack of mobility and the inevitable ex ante limits to competition” (Amis and Cornwell, 2005). Sponsorship can release competitive advantage for the firm in two markets; 3 Page 5 of 28 ANZAM 2010 athletic properties and product markets. Consumer firms dependent upon a portfolio of high profile athletes can leverage this competitive advantage in the sponsorship market to acquire new athlete properties. Strategic Analysis: Athlete Sponsorship as an Alliance? Sponsorship has been framed as a strategic alliance since both partners are able to co-invest to further the attainment of their own strategic goals (Fahy et al., 2002). A strategic alliance is a “close, long-term, mutually beneficial agreement in which resources, knowledge and skills are shared with the objective of enhancing the competitive position of each partner” (Urriolagoitia and Planellas, 2007). The firm may receive an increase in brand awareness, market share, brand equity or access to new markets. The athlete property receives predominantly financial and technical assistance to help them pursue their sporting objectives. Trust is a necessary pre-condition for an effective alliance but it is not sufficient to sustain it. The literature surrounding sponsorship risk is largely confined to alliance partner selection, management of the alliance and what constitutes an effective sponsorship alliance. However, little consideration is given to the firm’s management of the sports property, the prevention of spokesperson risk and spokesperson crisis management. Firms are over reliant upon trust as the basis of the alliance (Farrelly