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31
Jan

From Functional Structure to Divisional Structure

Several weeks ago I posted several comments on the use of a functional organizational structure.  The organizational structure of the company can be changed to provide managers with more control over the company’s activities by increasing vertical and horizontal differentiation and the amount of integration between the subunits (i.e., functional groups and departments) that have arisen within the organizational structure.  When increasing vertical differentiation, organizational designers generally increase the number of levels in the organizational hierarchy, determine the degree to which authority and final decision making will be centralized at the top of the hierarchy, and introduce tools (i.e., rules and standard operating procedures) that can be used to standardize the way in which employees at the lowest levels of the hierarchy behave when carrying out their day-to-day activities.  An increase in horizontal differentiation involves grouping various functional groups so that the skills and resources in these groups can be focused on specific strategic goals and objectives.  Common examples are the creation of product-, customer- or geographic-based teams or divisions with there own dedicated resources for key functional areas such as manufacturing, sales, marketing and service/support.  Increased integration is necessary for coordination of activities between subunits and motivating employees and generally is accomplished through creation of task forces, teams and integrating roles.

The need for increased differentiation and integration once the limitations of a functional structure have been reached generally leads companies to transition toward a divisional structure in which functional resources are intentionally and formally grouped together in order to address and satisfy the specific requirements of particular products, markets or customers.  The goal of every type of divisional structure is to break the activities of the company down into smaller, and hopefully more manageable, business units with sufficient autonomy and expertise to overcome the problems that arose within the functional structure.  For example, product divisions can be used in situations where the biggest control problem for managers in the functional structure is the inability to keep up with a rapidly expanding product line.  On the other hand, if the challenge for management is the need to launch and maintain sales and manufacturing activities in different regions around the United States and/or in foreign countries, geographic-based divisions should be formed.  Finally, if the company has developed relationships with a large number of different customer groups it should consider breaking out its business into market-based divisions.  Over the next few weeks I’ll be providing more comments on one of these structural alternatives—product divisions. 

The content in this post has been adapted from material that will appear in Business Transactions Solutions and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

31
Jan

Public Relations Services Agreements

When entering into a relationship with an outside firm for public relations services companies should insist that the parties enter into a formal contract that describes the services to be provided by the firm, the compensation structure, rights to ownership and use of materials used and/or developed during the relationship, and the term of the relationship and right to renew the contract or terminate the contract prior to the end of the term. 

Depending on the circumstances, the firm will be expected to provides a variety of services in addition to ongoing public relations (i.e., introductions to and maintenance of media contacts) including organizing an analyst/media tour, Web site design and content preparation, product launch events, video interviews with key client executives, press releases for major events (i.e., product launches, major customers, major strategic alliance partners etc.), development and placement of articles, and trade show participation.  It may be useful to prepare a detailed addendum to the contract that spells out the elements and budgetary allocations associated with the specific public relations program that the firm intends to pursue on behalf of the client.  The parties should be careful to avoid potential future disputes through the use of unclear language in the description of services.  For example, descriptive adjectives such as “extensive” and “comprehensive” can often create misunderstandings between the firm and its client and provide a basis/excuse for clients to refuse to pay allegedly due to “non- performance.” 

The parties may choose from several different alternatives when establishing the method for compensating the firm for services rendered under the agreement.  One common method is to provide for payment of a minimum monthly fee, a “retainer,” in recognition of the fact that the firm will be providing continuous attention to developing and implementing a public relations campaign on behalf of the client.  The firm would not be required to demonstrate that the actual amount of time spent on the client’s account, when calculated using the firm’s regular hourly rates, equals or exceeds the minimum monthly fee; however, it is certainly reasonable for the client to request a summary of the activities that the firm actually conducted during the month on behalf of the client.  Other alternatives for a fee structure include a fixed project fee, hourly arrangement with advance, and hourly arrangement without advance. In rare situations part of the compensation for the firm may take the form of stock options and/or percentage of revenues from the particular product or service that is the focus of the public relations activities of the firm. 

In general, public relations services relationships should reviewed no less frequently than annually and performance should be measured against objective metrics mutually agreed upon by the parties before the relationship begins.  The contract often allows either party to terminate the agreement by providing advance written notice to the other, assuming that the agreement has not been breached, and requires that the contract period must extend at least to a specified date before a party can announce its intent to terminate.  The parties may also terminate the agreement immediately upon the occurrence of certain specified events with respect to the other party including insolvency and uncured materials defaults under the agreement.  Whenever the contract is terminated the firm should be obligated to assist in transfer of materials back to the company so that the company can continue its public relations activities.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (February 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

28
Jan

State Laws and Private Guidelines Relating to Advertising Practices

I’ve been discussing federal laws and regulations pertaining to advertising practices; however, advertisers must also be mindful of the fact that every state has laws and regulations that prohibit false advertising.  In general, state laws are based on the Uniform Unfair Trade Practices Act and/or the Uniform Deceptive Trade Practices Act and follow the enforcement mandate of the Federal Trade Commission of identifying and prohibiting "unfair and deceptive" acts.  In addition, states are concerned about passing off; misrepresentations relating to the source origin, quality or newness of a particular product; “bait and switch”; disparagement; and false and misleading comparisons of price and feature of competing products.  State laws are enforced by the 50 state attorneys general and those departments typically have separate departments that focus primarily or exclusively on enforcement and interpretation of state laws relating to consumer protection.  A complete survey of state advertising laws is available for purchase through the Retail Industry Leaders Association.

Advertisers should also keep abreast of private advertising and marketing guidelines.  For example, a comprehensive code of advertising is available for use and instruction through the Council of Better Business Bureaus (BBB), a nonprofit industry group.  The BBB code focuses on comparative price advertising accuracy and also deals with other common issues such as “bait and switch”, warranties, illustrations, refurbished product, comparative and superlative claims, testimonials and endorsements, and unassembled merchandise. The BBB Web site is also a good resource for information on advertising to children and online marketing.  Online marketing is also addressed in guidelines that have been issued by the Electronic Retailing Association (ERA), which call for truthful advertising that is not misleading and clear and conspicuous disclosures of qualifications to claims made in online advertisements.  The ERA guidelines also address substantiation of claims, testimonials and endorsements, disclosure of costs and other material terms relating to products purchased online, warranties, order fulfillment procedures and protection of personal information (i.e., “privacy”).

The content in this post has been adapted from material that will appear in Business Transactions Solutions (February 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

24
Jan

User Surveys for Outside Marketing Services Relationships

I’ve been discussing relationships with public relations and advertising firms.  In each case, it is important for the parties to regularly evaluate the progress of the relationship.  One way to do this is to have involved parties from the “client” (i.e., the company that has contracted for services from the public relations and/or advertising firm) answer a series of standard questions such as the following:

  1. Has the firm fulfilled the promises made during the selection process regarding staffing of the account?  Are the people working on the account responsive?  Does the client have ready access to senior level executives and managers from firm?
  2. Has the firm adhered to the budget agreed upon by the parties for marketing-related activities?  Does the firm keep detailed records of the work performed and provide the client with clear and fully itemized invoices?  Are the charges in each invoice consistent with written activity reports for the same period?
  3. Do the people working on the account communicate regularly and proactively with the client regarding the status of various projects?
  4. Has the agency consistently completed projects on a timely basis and within the budget parameters agreed upon in advance by the parties?  Has the amount of rework and revisions to materials prepared by the agency been minimal or extensive?
  5. Has the agency been providing the client with new and creative ideas during the course of the relationship, as opposed to simply executing the originally-agreed statement of work?  How well has the agency done in identifying opportunities and offering innovative solutions?
  6. Has the agency demonstrated that it has adequate knowledge and understanding of the client, its organization, and the industry within which the client is operating?  Has the agency worked effectively with other functional groups within the client organization (e.g. sales)?
  7. Has the agency been open and transparent in its dealings with the client?  Has the agency made an effort to understand and adhere to the client’s ethical values and policies?  Has the agency fairly represented the client in communications and relationships with third parties (e.g., media outlets and advertising agencies)?
  8. Has the agency cooperated in the development and use of mutually agreed metrics to assess the performance of the agency and specific campaigns and tactics in achieving the marketing objectives of the client?

The results of this survey should be used to create an agenda for regular meetings between the principals from both sides to discuss how the relationship is going and to make necessary adjustments in the way that the parties interact with one another.

24
Jan

Other FTC Regulation of Advertising Practices

While the Federal Trade Commission (“FTC”) focuses primarily on false advertising and advertisements that make claims relating to health and safety, there are numerous other specific FTC rules that apply to various types of advertising.  For example, the FTC has been very concerned about deceptive or unfair advertising practices with respect to advertisements for alcoholic beverages and such advertisements cannot by their content or placement be directed to underage consumers.  In addition, since the FTC believes that children may be more vulnerable to certain types of deception advertising the FTC pays particular attention to advertisements aimed primarily at children.  Mail or telephone order merchandisers—who solicit consumers to place orders by mail, telephone, fax, or computer—must adhere to the general standards of truth-in-advertising and must have a reasonable basis for believing that ordered products can be shipped within the time period specified in any advertisements (or within 30 days if no time period is specified in the advertisement.  The FTC also has rules and guidelines concerning the use of testimonials and endorsements from consumers, celebrities and experts in advertisements.  A non-exclusive list of other areas of concern, which are the subject of specific FTC rules and guidelines, includes:

  • "Bait and switch" advertising, which occurs when a company advertises a product that it has no intention of selling, but instead plans to sell a consumer something else, usually at a higher price;
  • Comparative advertising;
  • Advertising for consumer credit;
  • Advertising for dietary supplements, including claims for "health foods," vitamins, dietary supplements, and similar products;
  • Advertising jewelry, including gold, silver, platinum, pewter, diamonds, gemstones, and pearls;
  • Advertisements for over-the-counter drugs;
  • Energy savings claims for applicants, lighting products, and insulation;
  • Health claims in food advertising;
  • Advertising relating to leases for cars, household goods, or other products;
  • Tobacco advertising (i.e., advertisements for cigarettes, cigars, or smokeless tobacco products); and
  • Claims that products are “Made in the U.S.A.”.

Internet advertising is subject to the same laws and standards that apply offline.  The bottom line is that advertisers should carefully consult FTC rules and guidelines before launching any new campaign to ensure that they are in compliance.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (February 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

21
Jan

Agreements for Advertising Agency Services

In my last post I discussed some of the issues that arise when negotiating a contract for public relations services.  Another important partner in the marketing area is an advertising agency and that relationship will also require some form of services contract.  Since the advertising agency is chosen to become a key partner in any company’s efforts to develop and distribute information regarding its products and service through various media channels the agreement should address how the agency will assist the company in planning, preparing and placing advertising for the company’s products and services.  The scope of the services to be provided by the agency should be based on an analysis of the company’s current and proposed products and services and the markets in which those products and services will be promoted and sold.  The agency will be responsible for dealing with the parties that control the platforms on which the advertising will appear (e.g., newspapers, magazines, radio and television stations, and online advertisers).  Compensation to be paid to the agency will generally be a mix of commission and fixed hourly charges as specified in the agreement.  The agreement should also address billing procedures, rights of ownership and use in intellectual property created by the parties while developing the advertising materials, the rights of the agency to work for competitors, and the term of the agreement and events that might trigger early termination of the agreement (and the consequences of early termination).

 

In general, advertising agencies are compensated on a commission basis, at a percentage agreed upon in advance by the parties, for placing advertising with the media and for arranging for procurement from third parties services or properties necessary for the conduct of the advertiser’s marketing campaign.  The advertiser maintains control over the compensation by virtue of the fact that it must authorize advertising placements and the procurement activities enumerated in the agreement.  Activities not compensated on a commission basis will be compensated at an hourly rate negotiated by the parties; provided, however, that the agency has agreed in advance to a cap on the hourly rate.  Before proceeding with any special projects that would be covered by the hourly rate arrangement the agency will normally be required to provide the advertiser with an estimate of the cost and a schedule. 

 

In general, advertising agency relationships are reviewed no less frequently than annually and performance should be measured against objective metrics mutually agreed upon by the parties before the relationship begins.  Typically each party is allowed to terminate the agreement by providing advance written notice to the other, assuming that the agreement has not been breached.  In the event either party defaults under any material obligation owed to the other party the defaulting party will have the specified cure period to remedy the situation and if this does not occur the non-defaulting party would have the right to terminate the agreement.  In most cases the parties will be prohibited from terminating the agreement until a minimum period of time has passed absent a material default during the initial period.  The contract should describes the steps that need to be taken upon termination of the agreement, for any reason, and require that the agency transfer, assign and make available to advertisers all property and materials in agency’s possession to which advertiser is entitled provided that advertiser has made all required payments under the agreement.  Since termination often occurs because the advertiser decides to employ another agency the agency should be required to cooperate with the transfer of contracts and agreements with media, suppliers and talent that may be necessary in order for the advertiser to continue forward with its marketing campaign.

21
Jan

Make Sure You Can Support Your Advertising Claims

I’ve been discussing the truth-in-advertising rules included in the Federal Trade Commission Act, which provides that unfair or deceptive acts or practices with respect to advertising are unlawful.  In order to comply with the various requirements, advertisers must be prepared to provide the Federal Trade Commission (“FTC”), as well as state regulators, with proof to support all express and implied claims made in advertising materials.  Specifically, this means that advertisers must have "reasonable basis" for the claims, which means objective evidence that supports the claim.  The FTC follows different guidelines, and requires different kinds of evidence, based on the nature of the claim.  Obviously an advertiser must have the level of evidence that it actually says it has in the wording of the advertisement.  For example, if an advertiser claims that it product is recommended by three out of four physicians than it must have a reliable survey that provides support for that particular statement regarding the popularity of the product.  When the advertisement is not as specific, the level of proof required by the FTC will depend on several factors including what experts in the applicable field believe might be necessary to support the claim. Not surprisingly, health or safety claims that appear in an advertisement must be based on "competent and reliable scientific evidence", which means tests, studies, or other scientific evidence that has been evaluated by people who are actually qualified to review it and pass on its validity and completeness. In addition, when tests or studies are used to provide support the record must show that they were carried in accordance with methods deemed accurate by recognized experts in the field.  Advertisers must have the proof to support a claim in hand before they run the advertisement.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (February 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

17
Jan

Agreements for Public Relations Services

In my last post I discussed some of the issues that might arise when negotiating the terms of engagement with a public relations firm.  In this post I want to provide a more comprehensive list of the issues that need to be considered.  Specifically, the executive responsible for marketing activities should be sure that any agreement for public relations services covers the following areas:

  1. Scope of Work.  Among other things the firm will usually be expected to make introductions to, and establish relations with, specified public relations targets such as editors, industry analysts, broadcast producers, representatives of print or broadcast media and others. Consider including an attached addendum which spells out in more detail the elements and budgetary allocations associated with the specific public relations program that the firm intends to pursue on behalf of the client.
  2. Term, Renewal and Termination.  It is common to provide for a 12-month term followed by automatic renewals for additional 12-month periods unless one of the parties decides to terminate the agreement.  In contrast to this type of “evergreen” approach the parties may simply agree on a single fixed term without automatic renewal and thus force new negotiations on salient points in the contract.
  3. Compensation.  One common method is to provide for payment of a minimum monthly fee, a “retainer,” in recognition of the fact that the firm will be providing continuous attention to developing and implementing a public relations campaign on behalf of the client.  Other alternatives for a fee structure include a fixed project fee, hourly arrangement with advance, and hourly arrangement without advance.  Billing and payment procedures should also be developed and described.
  4. Expenses.  The parties should create procedures for reimbursement to the firm for expenses incurred in connection with services provided by the firm.  Examples of expenses associated with the service provided by the firm include mechanical and art costs (including typography, artwork and comprehensive layouts), news distribution costs (including wire services and mailing houses), audiovisual production costs (including photography, slide and video production), research activities (including market research fees, on-line database charges, clipping services, and focus group costs), producer’s or packager’s fees, and third party spokesperson fees and expenses).  These expenses are passed on at cost plus a pre-agreed mark up.
  5. Intellectual Property.  The agreement should include rules for allocating rights to ownership and use of creative work developed during the course of the relationship.  Since the client is commissioning the creative work done by the firm it is natural for the parties to agree that all intellectual property rights associated with that work will vest in the client provided that the firm has, in fact, been paid for the services associated with creation of the work.  In turn, the agreement should make it clear that the firm retains ownership of its own proprietary information and tools including media lists and its own set of third party relationships.

Other sensitive business issues that might need to be addressed include whether or not the firm will be the exclusive provider of public relations services, inclusion of restrictions on the right of the firm to conduct public relations services for competitors of the client, and inclusion of restrictions on the rights of the parties to solicit or hire employees or contractors of the other party. 

17
Jan

Deceptive Marketing and Advertising Practices

In my last post I introduced the truth-in-advertising rules included in the Federal Trade Commission Act (“FTC Act”) and mentioned that Section 5 of the FTC Act specifically declares unfair or deceptive acts or practices unlawful.  In this post we explore in more detail the manner in which the Federal Trade Commission (“FTC”) enforces its deception mandate including the guidance promulgated by the FTC in its Policy Statement on Deception (“Deception Policy Statement”). 

Under the Deception Policy Statement, which can be found as an appendix to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984), an advertisement will be considered to be deceptive if there is a representation, omission or practice that is likely to mislead consumers acting reasonably under the circumstances; and is "material" (i.e., important to the decision of a consumer regarding purchase or use of a product).  A misrepresentation is an express or implied statement contrary to fact. A misleading omission occurs when qualifying information necessary to prevent a practice, claim, representation, or reasonable expectation or belief from being misleading is not disclosed. Not all omissions are deceptive, even if providing the information would benefit consumers. In determining whether an omission is deceptive, the FTC examines the overall impression created by a practice, claim, or representation. For example, the practice of offering a product for sale creates an implied representation that it is fit for the purposes for which it is sold. Failure to disclose that the product is not fit constitutes a deceptive omission. Omissions may also be deceptive where the representations made are not literally misleading, if those representations create a reasonable expectation or belief among consumers which is misleading, absent the omitted disclosure.  Practices that have been found misleading or deceptive in specific cases include false oral or written representations, misleading price claims, sales of hazardous or systematically defective products or services without adequate disclosures, failure to disclose information regarding pyramid sales, use of bait and switch techniques, failure to perform promised services, and failure to meet warranty obligations.

FTC analysis can be broken down into "express" and "implied" claims.  A claim is “express” if it is literally made in the advertisement.  For example, the phrase "ABC Mouthwash prevents colds" is an express claim that ABC Mouthwash will prevent colds.  On the other hand, a claim is “implied” if it is made indirectly or by inference.  For example, the phrase "ABC Mouthwash kills the germs that cause colds" contains an implied claim that ABC Mouthwash will prevent colds because it is reasonable for a consumer to conclude from the statement "ABC Mouthwash kills the germs that cause colds" that using the product will prevent colds.  In cases of implied claims, the FTC will often be able to determine meaning through an examination of the representation itself, including an evaluation of such factors as the entire document, the juxtaposition of various phrases in the document, the nature of the claim, and the nature of the transactions. In other situations, the FTC will require extrinsic evidence that reasonable consumers reach the implied claims including expert opinion, consumer testimony (particularly in cases involving oral representations), copy tests, surveys, or any other reliable evidence of consumer interpretation. 

The content in this post has been adapted from material that will appear in Business Transactions Solutions (February 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

14
Jan

Public Relations Firms

While companies generally develop and maintain an in-house department that handles various aspects of creating and implementing marketing campaigns, including relations with media outlets, one of the most common and important strategic relationships in the marketing area is with a public relations firm.  Companies may go through an extensive search procedure in order identify and select a public relations firm that suits their requirements with respect to the specific activities and ability to work within a reasonable budget.  The initial phase focuses on finding possible candidates and includes obtaining recommendations from business partners and researching the relevant trade journals to see what firms might have experience in the company’s industry and with the specific target audience.  The next step might be to create and disseminate a request for proposal (“RFP”) for public relations and marketing services.  Each RFP should be customized to the requirements of the specific company; however, it is essential that the document include some background on the business and mission of the company, the current public relations and marketing challenges for the company in the eyes of senior management, an outline of the proposed scope of work, a list of the minimum qualifications to submit a proposal, and a brief description of the procedures that will be followed with respect to reviewing proposals and ultimately making a decision.

 

Once proposals have been received from prospective public relations firms the company should move forward through a formal selection process including additional interviews with the principals of the firms that appear to be the best fit and perhaps asking the firms to complete a basic assignment so that they company get a better idea of the quality of their work and how they relate to clients.  Once the selection has been made the parties should enter into some form of contract or agreement that outlines their relationship.  Contracts with public relations firms generally include a description of the scope of work, timeline and protection language (for both parties).  The contract should be clear on fees and expenses (i.e., hourly rates vs. flat fees and procedures for monitoring expenses), confidentiality and ownership and usage rights with respect to deliverables created by the firm during the engagement.  It is not industry standard to enter into long-term contracts and both parties should expect that the relationship will be revisited no less frequently than annually.  In some cases the contract will take the form of a simple letter agreement.  As with any form of services agreement the parties need to reach agreement on the scope of work and the form of any deliverables that the client expected to receive from the PR firm.  Payment terms, early termination and changes to the statement of work should also be covered in the agreement between the parties.  With larger engagements the parties may negotiate a much more elaborate contract that includes detailed provisions regarding ownership of intellectual property, reporting, the right of the firm to work with competitors, and the consequences of termination.