Riku Ruokolahti: The Importance of Operating Environment Analysis in Reputation Management

“The business environment is currently undergoing a transformation.”

So far, we have outlined how reputation creates value, examined its place and role in strategy, considered the practical challenges of reputation management, and explored the process by which reputation is formed. I wouldn’t be surprised if, at this point, someone were already raring to go and rolling up their sleeves to tackle the organization’s reputation challenges.

Unfortunately, however, it is not that simple, because reputation can never be managed in a laboratory-created vacuum. An organization rarely has any influence over events taking place outside its walls. Reputation is always shaped by a specific time, place, atmosphere, and, above all, in the minds of other people. The previous chapters have focused on reputation and its management from the company’s own so-called internal perspective. In this chapter, we turn our gaze outward, to the environment where interpretations of what organizations do—or fail to do—are formed.

“The business environment is in a state of upheaval!” shouts a consultant dressed in a thin pinstripe suit during his intense afternoon speech. And he’s absolutely right. That is indeed the case. The operating environment has always been in a state of flux. Change was no small matter even during the “Dark Ages”; rather, the operating environment has been constantly changing. That is precisely why it deserves special attention.

Changes in the operating environment pose challenges for management

I don’t know of any management context where an analysis of the operating environment isn’t part of the strategic process. We’re talking about the basics here.
This should also apply to reputation management. The operating environment, however, consists of the time, place, values, prevailing culture, and political climate within which stakeholders interpret what organizations do or fail to do at any given moment.

The most spectacular failures of companies are all too often linked to a misinterpretation of the business environment. A classic example of this is the so-called “Kodak Moment.” Kodak’s core business was film and film cameras. Then it turned out that the world no longer needed them. Cameras went digital, and
printed photos became online images. Originally, the “Kodak Moment” was a marketing campaign by the company that promoted capturing life’s important moments in photos. The term took on a whole new meaning with the company’s fate. Nowadays, a “Kodak Moment” refers to that moment when you realize you’ve failed to take your environment into account. It would be easy to identify more examples of these moments, and you can surely come up with some yourself. Reflecting on these in hindsight raises the question: are companies really that out of touch? Oh, so this is how it went: the world went digital, and then we went bankrupt with all our film in 2012.

I would argue that significant changes have emerged in analyses of the business environment, but even though the interpretation itself was correct, the appropriate action was not taken. It is probably even more common that, despite the correct interpretation, nothing has been done—at least not on a sufficient scale or in a timely manner.

Well, why hasn’t it been done, if the information was already available? Because changing the status quo—which is still a good situation—is really difficult. If
the company has held a dominant market position in the film industry for the past hundred years, it can be hard to be the lizard that changes everything. Even if
a willingness to change is exactly what the company needs for its future, it could lead to getting fired. The organization isn’t ready to abandon
the old and develop the new, because things are still going just fine. On the other hand, it may seem unfair that the same company’s management teams have been allowed to develop the existing business and market position for the past hundred years, while you’re expected to reinvent the entire business. It might not work out, even if you do your best. And you can always blame the operating environment if you don’t do anything yourself. The operating environment is the world’s best scapegoat when no one is really personally responsible. Rising interest rates and currency fluctuations ate into our profits. And so on.

This leads to the conclusion that while management teams often find it quite pleasant to interpret the operating environment, reacting to it can cause significant conflicts. Faces turn serious just when something needs to be done. All actions involve risks, and inaction leads to a slow decline. This is precisely the case from the perspective of reputation
as well. However, the cycle of change in the operating environment can be even faster than other business activities on the reputation horizon, and that is why the work can be frustrating. What was interpreted a year ago as working in our favor is now a bad thing this spring. The wonderful environmental project from the spring before last can be interpreted today as greenwashing. And so on.

Since change is rapid, it makes sense to maintain and update an analysis of the operating environment relevant to reputation management fairly
frequently. Not only so that you yourself can stay on top of things and the changes occurring, but also because this creates a shared tool for discussion with other leaders. If such a tool does not exist, you can create one, for example, by examining the variables of an operating environment analysis aimed at the company’s strategic planning from the perspective of reputation. Do these variables influence how stakeholders interpret things? Ensure that your analysis emphasizes stakeholders’ values, attitudes, culture, the atmosphere of discussion, and the prevailing political climate more than a standard business environment analysis. These are factors that, on a general level, have a particularly strong influence on how your stakeholders interpret your actions.

The operating environment also offers opportunities

When discussing reputation, it is easy to focus on the various threats present in the operating environment. However, it is also important to consider the opportunities it offers
. A good example of the opportunities offered by the operating environment is the EU legislation on roaming between operators that came into effect in the summer of 2017. The law put an end to the collection of roaming charges.

In practice, this meant a significant reduction in the cost of mobile internet access in EU countries.

In the operators’ business environment analyses, EU legislation was naturally seen as a threat. Many operators responded to the change by applying to the EU for an exemption to continue roaming pricing, and they were granted one. Of course, prices still dropped dramatically, by about ninety percent.

But was the change a threat to their reputation? Experience showed that it was definitely an opportunity. The reputation of the entire telecommunications industry
improved after the change—for some operators more than others. The industry had been treading water in terms of reputation for quite some time, and the sector’s reputation as a whole wasn’t exactly stellar. When the change came, some operators made the reduced roaming rates the centerpiece of their marketing. Now you can WhatsApp at Sergel’s Market for the exact same price as in Porvoo! Isn’t that great! This message resonated. The positive momentum following the significant price cut caught on with the operators.

Climate change affects everyone

One of the greatest changes of our time from the perspective of reputation management is the mainstreaming of the discussion on climate change. Underlying this is
concern for our future. It is safe to say that there is a scientific consensus on the matter. Of course, there are dissenting viewpoints, but they are marginal in the grand scheme of things, and criticism is a natural part of scientific inquiry. Public debate on the subject has become fiercely polarized, and as a result, dissenting viewpoints are gaining disproportionate visibility.

But let’s trust the climate scientists and assume that climate change is real and that it is caused by humans. Climate change is therefore unlikely to be a passing trend. If the predictions hold true, the debate will continue and intensify further. The issue is real and the problems are difficult; they cannot be resolved in one fell swoop. This time, no one else is going to solve the situation. Everyone must act now; the rest are sitting on the sidelines.

To put it bluntly, what was considered great climate action ten years ago is no longer enough today. And what is considered great climate action today may not necessarily go very far in a few years’ time. This is an example of a phenomenon that is shaping people’s perceptions of corporate responsibility right now. As this phenomenon evolves, these perceptions may change quite rapidly.

There is no export industry from Earth to other planets. When it comes to the climate, we all operate within the same internal market. Steel produced on the other side of the globe using traditional methods generates massive amounts of carbon dioxide emissions into the atmosphere, even if it were used to build a hypermodern and energy-efficient skyscraper in Finland. This logic applies to everything. The climate impact of that really cheap and quirky item you ordered from a Chinese online store doesn’t end up in Finland’s climate balance sheet, but it does end up in the atmosphere.

The same logic applies in reverse: carbon dioxide must be sequestered where it naturally binds. In this regard, the northern coniferous forest zones and peatlands are just as significant as the rainforests of the tropics. From a climate perspective, Finland’s emissions and climate efforts stand alone. From a climate perspective, our northern country is home to a marginal number of people—an asymmetrically affluent segment of the global population—who, relative to their numbers, have a disproportionately large impact on the climate.

In the previous paragraph, I outlined the framework within which the climate debate takes place and evolves. I did this by looking at the big picture
and setting aside the political dimension. My writing is starting to resemble an opinion piece more than an analysis, but I believe it
serves as a good starting point for discussion as you consider your operating environment analysis from the perspective of sustainability. The climate debate is, in fact, a rare topic in that it affects all companies in some way.

Riku Ruokolahti has written a handbook on corporate reputation and reputation management. The excerpt published here—on the importance of operating environment analysis in reputation management—can be found in the second section of the handbook: Systematic Reputation Management.

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