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Managerial Accounting Review

by: yash jain

Managerial Accounting Review

Marketplace > Indiana University > Managerial Accounting Review
yash jain
GPA 3.78

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Date Created: 01/19/15
Topic 6 N GOs as Social Regulators A NGOS and NonMarket forces B Examples of NGO Campaigns i Greenpeace ii Rainforest Action Network iii Sierra Club C Private Politics versus Normal Politics i Changes to the normal political issue stages D Rise of the NGO i Communication costs ii Public trust iii Government bureaucracy iv Global business E Targeting behavior i What makes a good target F Takeaways from Starbucks G Readings i CASE Collaborating with Activists Starbucks amp NGOs ii OPTIONAL Private Politics Topic 7 Growth Versus Sustainability A Strategic Sustainability and Profit Drivers B External Damages i Implications for efficiency prices and outputs ii Social Efficiency versus profit max behavior C Green Incentive Mechanisms i Government Taxation a Tax set optimally ii Tradable Pollution Permits a Set up of the model b Implications for when to buy and when to sell c possible advantages and disadvantages iii Accountability for waste iv Government Incentive programs a Tax credits grants subsidies partnerships v Green NGOS a Collaborative NGOS b Attacking NGOS D Readings i CASE Anatomy of a Corporate Campaign RAN and Citigroup ii OPTIONAL Protecting the Environment and Modeling Market Failure Topic 8 N onMarket Risk Management A Asymmetric Information i Uninformed Demand and Uninformed Supply Examples ii Implications for prices output and efficiency iii Role of government B Markets for Regulation Private Regulation i Brands and Franchises ii Examples Best Western UL and Carfaxcom C Public versus private regulation D How much regulation is efficient E Additional Social Pressures NGOS F Readings i CASE Hitting the Wall Nike and International Labor Practices ii OPTIONAL The regulation of quality standards Topic 6 NGOs as Social Regulators NonGovernmental Organizations NGOs 1 NGOs are nonprofit organizations that are formed without participation of any government a usually the NGO forms around a social movement to organize members around the cause i NGOs are thus also often referred to as civil society organizations b NGOs are very narrole focused to one issue which gives them an advantage over firms that have many issues to think about i Altria has a lot of stakeholders to take care of from the NGOs in uences NonMarket Forces Past Focus Policy taking direct actions on Corporate behaviors 1 PUE IEE Palm 39 EX 1 California gov amp Secretary of Agriculture Ventria regarding rice production makers EX 2 Foreign policies Genicon in pursuit of new adequate global sites r EX 3 Gov Regulation Napster s inability to allow illegal music sharing EX 4 Antitrust law DeBeers s violation through cartel formation EX 5 Trade Regulation Chiquita s banana trade Theme GOV to Business Current Focus Activists taking direct actions on Corporate behaviors Government takes too long going right after Corporates Let s ippir at e iiew environmental N605 CampaignsWatch each Greenpeane y Image of environmental activists I Recruitment widen 2 quot I 1 Hippie nun5W campaign 2 Treehugger Chain themself to tree to prevent cutting 3 Borkenstein IU course 3 Al gore not activists but went around the world with activists Video 1 Greenpeace Appie Campaign and Apple Hespenee Reinfnreeteietien Hetwnrk Diein funepal Sierra EllJib Green Peace Environmental Terrorist 39 Emma d E I Recruitment Video emlpusee even 133 nippinp1ntargen Antl39SUV campalgn ennui menu Apple Campa1gn and Apple Response Rainforest Action Network a Die ing for coal Sierra Club a 2dirty4college b Campuses Beyond Coal IUB TOP 10 TARGET 0 Coal Free IU Activists do radical things to acquire three common leverage points 1 Publicity 2 Customers 3 EmployeesInvestors Activists are radical and crazy but they are strategic Watch the Videos and figure it out on your own Can t be bothered to summarize them The Rise of the N GO 1 Why are there more NGO campaigns a Communication costs are rapidly decreasing i easier to organize and manage campaigns ii reduces the cost of organizing iii Savings can be spent for more projects b Public trust in corporations is declining i Easier to sway public opinion against firms ii M Distrust Corporates M distrust NGOs c Government bureaucracy is getting thicker i Policyoption can involve long delays ii Requires more resources d Businesses are becoming more global i Intergovernment action is hard to organize gov can t really deal with global issues so NGOs took over ii Nike s operations all around the world so gov can t really take charge over Nike s entire operations Private Politics 1 Private Politics occurs when NGO activists directly engage private firms with their concerns instead of or in addition to trying to in uence public policy formation 2 The Normal Political issue stages include a Development i Concern about an issue develops from dissatisfaction of an interest group 1 ex Ventria only a few concentrated activists groups environmentalists nutritionists ii Initially the issue lacks broad appeal or widespread public support iii No one besides those groups are interested b Politicization Crucial stage for activists to be there with relevant information to appeal Everyone who can in uence is informed at this stage i Issue commands more public attention 1 activists demonstrate more publicly 2 form coalitions 3 organize sociallypublically 4 Inform voters and taxpayers ii Politicians publically adopt issue as a campaign platform 1 Gains public issue feel that their voter base can in uence iii Gains main public attention c legislative If gains enough politic interests a lawbill is written Activists have less to in uence i Through voting system Activists start to have not much to say NO votes If not enough votes go through the law diminishes and the Issue is dead YES votes 1 Government will take over to take care of the bills 2 if the law is too soft not much in uence is expected to be seen iii Bill moves through the political process House and Senate to become law or to get rejected iv Majority yes votes needed to pass the legislation d implementation When implemented activists really can t do much i Regulators introduce implement and enforce final rules ii Rules and interpretations can be challenged in the courts Normal Political Development e Activists VS Politicians Activists ability to in uence the AW T regulation begins to diminish as the stages progress lln llurermne A Felillic l i Stage 1 amp Stage 2 Public lt Private 1 Everybody is gathering information to solidify the issue llama activists politicians voters 2 The activists have a lot to say 3 They have the incentive to be angry and unhappy about problems 4 After stage 2 Activists decide on whether go with the quotTIME public or carry their own private politics to bring in uences ii If the public politics seem satisfactory Stage 3 amp Stage 4 Public gt Private 1 Politicians take over 2 Once the regulation is settled 3 Activists ability to in uence is dead Private Politics If the public is not satisfactory private politics take over 1 In private politics the last two stages are replaced with NGO engagement of firms a NGOs making direct demands on firms instead of legislative stage i Issues Demands I want you to change in ii Backs up the threats with either Carrots and Sticks 1 Rewards Good job articles on wall street journal praises 2 Threats Direct consumer boycotts or negative PR iii Leverage Points Consumers Employees Media Investors Supply Chain Input to make Starbucks buy more Fair Trade Coffee b Resolution of the NGOfirm dispute Instead of Implementation Stage i Bargaining by the two sides to come to an agreement ii May result in firm action or may agree to disagree 1 Agreement happens somewhere in between NGO wins NGO gets everything it demanded Firm does nothing Fights off Firm wins and does nothing 2 Starbucks case Not middle but skewed Resolution Starbucks agreed to buy more Fair trade for lyr trial basis Once a month brewing only in domestic stores 12365 Ninja in social strategy got rid of national boycott Ceasing the risk mitigating the risk Social strategy Ninja did the minimal to win over advantages 3 Nike and Citigroup got their weak spots eXposed and struggled hard to establish resolution 4 Two deciding factors that determine the l Leverage of the NGO Spots to poke and change EX Ability to in uence the firm s profit supply chain etc 2 Reasonableness of demand EX Is the Cost of the change reasonable EX Does the appropriate technology eXist EX Demanding Sierra club to stop coal production is not reasonable since its business is all about Coal usage EX Hunttington pharma required to test on Animals Wants to shut down the company Lots of leverage yet not reasonable demand Nike Citigroup Starbucks NGO Firm Activists Invite CEOs Let s not punch each other and have a Q amp A session Getting to know each other 1 How do you target Answer We power map the issue a We learned it in business schools but actually made up activist technique founded based on business principles value chain supply chain stakeholder Etc Analysis b Hybrid of major business principles 2 This is how Activists do their homework Using POWER MAP Big Issue Brazilian Deforestation Homework What are the Direct Industries that cause the deforestation in Brazil a Timber Paper Furniture home building production b Agriculture c Urban eXpansion d Livestock cattle e Population EXpansion Let s break down each industry and see who are involved Choice b Agriculture i Corn Coco Ethanol Soybean ii Human Feed Soy milk tofu iii Animal Feed Cows to Beef Pigs to Pork Chickens to Chicken iv Chicken to McNugget McDonald good potential one to target v Some smart guy found out that McDonald sources 05 of the soybeans produced in deforested Brazilian land vi Is this is enough to target McDonald YES YES YES vii McDonald possesses every Targeting criteria that Activists look for viii Result McDo Lobbied the Brazilian Gov to put new standards on agricultural products to mitigate Green Peace s threats and demands Took the leadership role and changed the entire supply chain Targeting Behavior 0 McDonald as a perfect Target a Well recognized global brand b Leadership in Fast Food industry c Consumer product firm able to make consumers to boycott Mc Products d low switching costs Burger King etc e McDo Worst Offender but was Targeted to bring a quicker in uence f Sharing NGO interests Supersize Offered more healthier salads calorie conscious 1 What characterizes a good Target a Well Recognizable brand name b Firms that have a leadership position in the industry c Consumer product rms downstream firms d Firms producing products with lowswitching costs e Sometimes the worst offenders are targeted but not always f Firms that have shown interest in the NGO s issue in the past 2 Targets are picked speci cally to fit each NGO campaign a Easier for NGOs to have a target that will bring them a guick win b Limited budget limited resources stimulate them to be strategic and selective Topic 7 Growth Versus Sustainability Pro t Drivers of Sustainability 1 Strategic Sustainability When firms incorporate sustainable business ventures in an effort to increase profits a Improve internal efficiencies cost reductions EX 1 Less packaging Benefits Low carbon foot printing amp less cost Sustaining environment amp more profits Risks Product damage rate less protection amp cost amp Ineffective Advertising EX 2 Target amp Little Flash drives Benefits less production cost helps the environment Risks possible theft Target has been studying to know rather selling smaller products lead to more profits Are the smaller items being seen by customers are the products being stolen EX 3 Video Conferencing and Consulting firm Benefits Less traveling less usage of Risks Less personal contact resulting in losing contracts Homework Will going green be advantageous over the risks b First mover advantage with industry technology Starbucks Coalition of activists to create and stand up as the leader in the new Fair Trade coffee Market Reaffirming their leadership position c Mange regulatory risks i Preempt stall or shape future regulation ii Take advantage of government subsidies iii not only mitigating risks but also creatinngegulatingshaping the future market EXl BP s acquisition of solar concept Took the new leadership position and lobbied government officials to regulate on the distribution of energy BP made sure that their solar parts took major parts in energy distribution EX2 Altria they publicize that they support federal regulation in attempt to enhance their competitive position in selling tobacco d Manage growing social risks and opportunities NGOs Exl Starbucks Take the risks Mitigate the risks and take the advantage of the new opportunities e Enhance brand equity and corporate reputation i Differentiate from competitors ii Tap into new customer markets iii Employee retentionrecruiting concerns iv Attract greensociallyminded investors SRIS a lot of comps are trying to quantify the effect of going green on the above factors External Damages 1 External Damages A firm s production imposes costs on a third party without their consent Look beyond society when thinking about third party be more specific about who the third party is EX Paper factory i Consumes water from the river ii Mix the water with paper materials toxins glue hazardous iii Squeeze out all the liquid and shoot it back to the environment without careful purification The third party who bares the cost i Fishing industry Increasing Dead Fish Less fish to catch ii Water supply company Contaminated water iii Farming industry Dirty water less yield less crops for selling iv Livestock industry dirty water cows get sick less meat for selling V Recreation industry bad water to jet ski and oat boats gtXltgt ltThe external costs are not confronted by the society The external costs are transferred from Biz to Biz a supply underestimates the true production costs Over production b From the View of efficiency too many units are produced g MSC MPC quot MEL p 1 MPC MIT MPB MPC Q9 Qf F Output M Marginal S Social C Cost P Private B Benefits 1The Value Curve MPB MSB there are no external benefits the private benefits cover all the society s benefits No one benefits from external effects 2 The Cost curve on Firms View MPC Marginal Private Cost Direct Costs that firms carry to production the inefficient yet profitable costs i Firms always maximize their profits ii The intersection between MPB amp MPC Profit potential Profit MPB Potential Profit MPC Potential cost Marginal Profit Profit Potential Qf Maximized quantity level for firms to maximize their profit Pf Maximized price level for firms to maximize their profit 3 The Cost curve on Society s View MSC Marginal Society Cost The potential cost that the society faces The trueefficient costs of production a MPC the firms cost Costs that firms produce b MEC Marginal External Cost Pollution Cost which has been ignored by firms c Marginal Society Costs Society bares both the direct costs MPC the indirect costs MEC 4 Keep in mind Pollution Costs constantly build up 1 Little bit of pollution Firms can deal with it 2 As pollutions build up the cost of dealing with the pollution expand 3 This is why the gap between MPC and MSC gets bigger as more unitspollutions are produced 5 Finding the best for society Social BenefitsValue VS Social Cost a The issue Qf amp Pf firms are producing overproducing too many units at a lower price relative to the socially efficient level Pe amp Qe b Why Cuz they get to avoid the external costs pollution 0 Result Causes inefficiency d Qf Qe the quantity that is being over produced inefficient quantity i every unit between Qf Qe ii Cost of pollution gtexceedsgt Value benefits of producing the pollution iii Causes net costs on Society 6 Important even at the intersection between Q6 and Qf the socially efficient point i The pollution level at 0 ii Too costly to get rid of all pollution iii As long as the pollution costs are less than the benefits it is considered efficient 7 Every Unit below Qe Cost of pollution MSC lt less than lt the benefits of producing the pollution MPB a As soon as the quantity goes above Qe i Cost of pollution gtexceedsgt benefits of producing the pollution ii The benefit you get does not cover the cost of production Incentive Mechanisms to GO Green How can we incentivize firms to get rid of the above inefficient units of production 1 Government Taxation 2 Tradable Pollution Permits 3 Assign Accountability for Waste 4 Subsidize Green Technology 5 Green NGO incentives and pressures External Damages and Taxation 1 Government will impose tax to decrease supply and increase consumer prices Problem underestimation of the cost of production Solution Tax increases the cost of production to shift the MPC up eft 2 Set the tax Marginal External Cost at the efficient quantity Qe i increase the cost of production price increases demand decreases shrinks the market n MSC MPC MEC 39 MPC tax MPC Pia Pf 1 MP5 MSB Q6 0 Industry Output 3 Firm s Sweet spot the intersection between MPB amp MPC Qf and Pf 4 Society s Sweet spot the intersection between MSB amp MSC Qe and Fe or Ptax 5 Tax External damages MEC To find the right amount of tax a Social Cost Pe Private Cost Pf The Tax amount b To eliminate the inefficient units of production Qf Qe 6 However Tax is not very often used why a Hard to estimate the MEC b Corporates dislike the fact that it is regulated by government they lose twice a they lose marketsales due to market shrink why do we have to get small for producing pollution b Gov is lazy about measuring MEC tends to hold on to one value for a long time making firms question whether the tax is above the amount that actually covers the inefficiency C proves to be inefficient as corporates send lobbyists to threatenpersuade politicians Tradable Pollution Permits 1 Background Regulation system a US GOV i E for Carbon has the foundation but not yet has a definite regulation ii YES for Sulfur since 19705 only on heavy industry miningenergy producers b Europe i m for Carbon ii E for Sulfur c Carbon regulation is trickyon constant debate everyone emits carbon i Debate is it fair to regulate only carbonheavilyrelated players or What about comps like WalMart ii WalMart wants to be regulated ability to deal With Carbon incurs far lower costs relative to competitors Target Kroger to gain competitive advantage 0 Once the efficientallowable amount of pollution is calculated they Will be converted to permits 1 Government issues pollution permits that pertain to a permissible level of pollution and then government lets the firms trade the permits as needed a The permit specifies the type of pollution amount of pollution and time period of use b Permits can be given out to firms for free or they can be initially auctioned or sold to the firms in the industry 0 Rule 1 Every time you pollute you have to submit a pollution ticket 2 If you run out you need to buy some from not gov but from other companies Who do not need pollution tickets the tickets are limited 3 Depending on the cases the demand for pollution tickets may uctuate 1 Distribution To avoid possible unfair distribution to prevent from being claimed to have favors in a certain industry the gov handed out equal amount to every industry 1 of permits firms 2 If a firm does not need all the permits they can sell it to raise revenue to invest on Green technology to further decrease the use of pollution tickets 3 Auction Troublesome gov gets to raise revenue bad perception due to opaque usage of the revenue 2 Pollution permit model assumption a One unit of output produces one unit of pollution 1 Q lPollution or 1 Production 1 Pollution b Marginal Abatement Reducing pollution Costs MAC are measured as lost profit from decreasing output to reduce pollution no other technology is available 1 only by reducing the production can reduce the amount of pollution No other technology can reduce pollution emission 0 Debate Let s have the market to decide instead of the gov Tradable Pollution Permits Graphic The total industry supply of pollution permits S is split among the existing firms in the market S S1 Q and permits are traded at the going market price P 3 permits 3 permits 1 A Firm 1 Firm 2 MatrMPB1MPC1 Mfr2 MPzMPCz 0 Q1 92 Q2 1 Mn MPB MPC Starts big and gets smaller as profit gets maximized 2 S The total number of Permits 6 aSoffirms623 i S1 3 ii S2 3 b Government perfecth sets the Supply of permits the demand is the factor that determines the price of the permits i The more firms wanting the right to pollute the higher the price of permits P Vice versa 3 Q1 amp Q2 Profit Maximization point Where each firm wants to be producing a Yet each firm is not given the right to reach the Profit Maximization point due to the limited right to pollute 1 3 permits 3 permits Sm v 52 initial Firm 1 Firm 2 P l39 fltE Ilnitial Abatement V Casts initial Abatement Costs 13 3 MTEE MP BE39M PC F MmrMPBW Mfcr GainE Q 1 1 Initial Profits Once the number of permits is given beyond the permit quantity Initial Abatement Cost Firm 1 lt Firm 2 More permits needed to cover the rights to pollute a Firm 1 needs to sell i Selling the permits for 50 is more profitable than producing more units to sell for 40 b Firm 2 needs to buy i Buying permits to produce and sell more units for 60 is more profitable than selling permits for 50 32 F All 1 Initial Profits Pro ts Gained from Selling Permits lnitial Abatement vCosta Cost Savings from B ying Permits llhnitial Abatement A Costs Mug MPBZMPCZ MmMlPB1Ml301 Q1 W1 Q1 Initial 02 QB Q2 Permits Sold P l39OfitS Permits Purchased Let the two firms trade permits Rule of thumb Decrease quantityoutput as long as marginal profit is less than P Permit Price Rules 1 Start from Q and decrease output until marginal profit Pilt Permit Price 2 Determine whether the quantity is below or beyond the of permits S a Below selling permits by decreasing quantity is profitable b Above Buying permits to increase quantity is profitable Firm 1 1 Q1 to Q1 Marginal pro t Mn Permit Price P 2 Below the number of permits S a Below selling permits by decreasing quantity is profitable 1 Selling the permits for 50 is more profitable than producing more units to sell for 40 2 The new triangle Avoid the initial abatement cost and make an additional profit by selling permits Firm 2 1 Q2 to Q2 Marginal Pro t Mat Permit Price P 2 Above Buying permits to increase quantity is profitable 1 Buying permits to produce and sell more units for 60 is more profitable than selling permits for 50 2 The darker triangle additional profitcost savings over the initial abatement cost by buying more permits to pollute Practice Problem Guidance Q of MPBMSB MPC MSC Mn MPBMPC permits 1 100 20 40 100 20 80 2 90 30 60 90 30 60 3 D 41 QD 80 40 40 4 70 50 100 70 50 20 5 120 60 60 6 50 70 140 50 70 20 Q1 Pro t maximizing output for rm MPB MPC 60 60 When Mn 0 another way to nd pro t maximization point Pf60 Qf5 Total profit The sum of all Marginal Profits till the relevant unit 80 60 40 20 200 Q2 Social Equilibrium MSB MSC 80 80 Fe 80 Qe 3 Total Profit The sum of all Marginal Profits till the relevant unit 80 60 40 20 180 Q3 Looking at tables to see who needs to Sell Hold on or Buy gt quotquot Each firm gets three permits for free gets to produce until Quantity 3 without any abatement cost Sticking with three permits a Has the right to produce UNIT 1 2 amp 3 b Profit 80 60 40 Question Will I be better off by either selling or buying permits a As long as Marginal Benefit Mn beats greater than Permit Price P it s ok to hold the permits Selling Firm 1 Situation Juggle the Permit prices P vs Marginal Pro t Mn I L Q of MPBMSB MPC MSC Mn MPBMPC permits P 1 100 20 40 100 20 80 2 90 30 60 90 30 60 3 80 40 80 80 40 40 4 70 50 100 70 50 20 5 60 60 120 60 60 0 50 6 50 70 140 50 70 20 Given that the permit price P 50 a atQ 1M7t 80 gt P 50 b at Q 2 M71 60 gt P 50 c at Q 3 Mn 40 lt P 50 01 Stop producing and selling 3 units and sell the permit for 50 1 Profit 80 60 50 190 gt 180 the profit for holding the three permits and producing at Q 3 i 10 GAIN by selling permit No Pro t Neutral Situation I I Q of MPBMSB MPC MSC Mn MPBMPC permits P 1 100 20 40 100 20 80 2 90 30 60 90 30 60 3 80 40 80 80 40 40 4 70 50 100 70 50 20 5 60 60 120 60 60 0 30 6 50 70 140 50 70 20 Given that the permit price P 30 a atQ 1 Mn 80 gt P 30 b at Q 2 M7 60 gt P 30 c at Q 3 M71 40 gt P 30 d at Q 4 Mn 20 lt P 30 d1 hold on to the initial of permits and continue producing 3 units d Profit 80 60 40 180 180 the profit for holding the three permits and producing at Q 3 i 0 NO GAIN by sellingbuying permits Buying Firm 2 Situation Q of MPBMSB MPC MSC Mn MPBMPC permits P 1 100 20 40 100 20 80 2 90 30 60 90 30 60 3 80 40 80 80 40 40 4 70 50 100 70 50 20 5 60 60 120 60 60 0 10 6 50 70 140 50 70 20 Given that the permit price P 10 a atQ 1 Mn 80 gt P 10 b at Q 2 M7 60 gt P 10 c at Q 3 M71 40 gt P 10 d at Q 4 Mn 20 gt P 10 d1 Buy 1 more permit to produce the next 4th unit e Profit 80 60 40 20 10 190 gt 180 the profit for holding the three permits and producing at Q 3 i 10 GAIN by buying permits Tradable Pollution Permits 2 1 Nice Features of tradable pollution permits a the overall level of pollution will be gradually reduced as the number of permits is usually decreased over time i Gov s longterm goal to reduce of permits by encouraging firms to sell amp invest in capital to deal with minimizing pollution b More permits go to those firms who value them the most the high abatement cost firms i Higher abatement more demand for permits ii Companies whose value of profits gt value of abatement costs 0 Low abatement cost firms can gain profits by selling unused pollution permits i Lower abatement more incentives to sell ii companies whose value of profits lt value of abatement costs d Environmental groups can buy the permits and effectively reduce pollution more i NGOs buy them amp tear them up to eliminate possible permissions to pollute 2 Criticism of tradable permits a The initial allocation of permits may go to the most politically connected firms b Measurements of permits are often inaccurate Accountability and Incentives 1 Assigning accountability for a firm s waste can alleviate external damages a Secondary markets for waste products will evolve b Examples Cows now eat spent beer grains oversweetened Reese Puffs and burnt PopTarts College student diet Ex1 Beer Produce lots of waste tons of decayed waste hazardous i transportation costs on managing wastes increase ii Dumping landfill harms the environment iii Solution Call in cowporkchicken owners Secondary markets to buy the wastes iv Farmers gain from the waste of beer industry byproduct turned into value Win Waste Management Win Well fed cattle Ex 2 Jacksonville Budweiser plant whole bunch of beer spill out during production stages i Underground containers collect the spills to avoid wastes ii golf courses buy them to grow premium grass fields Pesticide free higher quality iii Joke Reuse the spills and sell them at a discounted rate Natty light 2 Government can offer subsidies to firms to encourage more investments in green technology Examples a Tax credits for green investments b Grant money for green R ampD c GovernmentIndustry Partnerships ex Hybrid Cars citycountystatefederal tax credits Green N onGovernmental Organizations 1 Green NGOs strategically target companies to evoke industry wide movement toward green technology a Some green NGOs partner with industry to collaborate on green technology and certifications i Share in RampD expenditures Environmental Defense Fund EDF EX Collaborated with McDonald to change the packaging of Big Mac from plastic to hardboard win fund Macdonald win less landfill ii Certify Green Features Ex US Green Building Council LEED b Other green NGOs attack industry to force green technology adoption i Negative PR campaigns and Boycotts Greenpeace and Rainforest Action Network Topic 8NonMarket Risk Management Important Asymmetric Onesided unbalanced unequal lopsided One side has more information Buyers gt Sellers Buyers lt Sellers Punch line without complete information inefficiency occurs Asymmetric Information Demanders Point of View 3 Duninformed Lininformed Que Qf Q 1 Used Cars performance problems with the cars are not revealed to potential consumers a Consumers pay too much for the products b From the view of efficiency too much is consumed c example Prof Kreft s Blinky first car When you sell your damaged car the dealers will repair your part and not reveal the damages when reselling Therefore the value is exaggerated when resold to a third party consumer d Buys for 500 amp marks up the price to 2500 e Inefficiency sellerssuppliers have the full information vs Consumers are uninformed about poor performance i Demand informed curve presents the true Efficient value of the used cars ii Supply curve presents cost of producing the used cars iii Cost of supplying the used cars gt Value of the car net cost on society INE iv They shouldn t be sold but they are sold because the consumers are unaware of the exaggerated value f once consumers are aware the demand decreases Demand shift to the left g Supply remains constant it only deals with valuation of demand Asymmetric Information Suppliers point of View I Sinformed f I Srunmf rmed I I I I I I I I I I I I I I Le Lf L 1 Worker Safety Health risks from producing butter avored microwave popcorn are not revealed to workers a Workers will be undercompensated b from the view of efficiency too much labor is supplied c Butter avor in small quantity harmless in large quantity causes diseases popcorn lung respiratory disease d Workers in the industry are not informed about harmful factors e once aware of the harms the less workers will be working Supply curve shift to the left f Demand curve the valuation of the workers g Supply informed the true cost of labor supply h Cost of labor supply gt value of the workers net cost on society INE i demand remains constant only deals with the firms valuation of workers Thinking positively If positive information is revealed the market will expand a However no firm will be willing to hold positive information because they are profitable b therefore most of asymmetrical situations will deal with negative information being missing c The previous examples deals with withholding negative information i Demand car selling amp supply poor working condition d examples of positive example withheld pharmaceutical companies i in order to produce a certain medicine requires approval from FDA ii the medicine can cure heart disease cholesterol problems iii very costly to get both the two cures approved So they only get the heart disease cure approved due to the higher popularity iv if both cures are approved the demand will expand even more Role for Government 1 Government ensures consumer and worker safety quality through productive regulation 1 Clean up the market ensure quality ensure information a different agencies regulate different aspects of the marketplace i Environmental Protection Agency Environmental quality of production ii Occupational Safety Health Administration Working environment iii Food Drug Admin US Department of Agricul EPA Food safety b EX The Federal Trade Commission Shuts down Miss Cleo for false promise of free psychic readings abusive telemarketing and tricky billing tactics i With thick Jamaican accent call free for entertainment After 30 seconds not free anymore ii False billing tactic is made late under different company name iii Owners were jailed for federal crime c average Free call cost more than 60 given that it is supposed to be 0 Demand uninformed Wf 60 Demand informed We 0 Ebay seller rating evolved to ensure complete information is distributed Markets for Quality Regulation 1 Private regulation forms when customers perceive that government quality regulations are insufficient a Private regulation will be profitable for firms if the market values the additional regulation over the cost of providing it 2 Examples of Private Regulation a The Best Hotels in West of Mississippi Best Western Hotel Hotel Inspectors i Owns no hotels but allows hotels to use its logo for a fee if it meets its own quality standards ii Creates long lists of inspection lists for hotels to meet and use its logo to increase its brand value profitable Marketing website occupancy etc iii Why Best Western Hotel makes money because consumers value it b Underwriters Laboratories Same as a but for electrical devices i Government does not regulate or control quality for electrical devices ii Create lists of standards and have private electronic devices manufacturers to invite them for inspections Get paid to allow firms to use its logo iii Why UL makes money Because consumers value it c CARFAXcom collect publically available car records from each state database i provides information about a car s history for a fee ii each state possesses records exclusively in house So if a California car is sold in Michigan the buyer will not know about the records iii CARFEX provides the combined records iv Why CARFEX makes money Because consumers value it 3 Generally brand names and franchises provide incentive to ensure product quality protect reputation i Does not always state that Best Western UL or CARFEX is the best but provides usable info that provides assurance ii Is BIGMAC the best hamburger No but it carries the notation of the quality Public vs Private Regulation 1 Public Regulation a Don t always consider the costs of regulation i Budget is fixed usually more costly in order to meet the fixed budget ii They throw in more costs if needed to meet the fixed budget b Funded through taxes paid by all individuals i Not everyone who paid benefits from the regulation ii even if you hate ying you still pay taxes for Federal Aviation Agency ight safety regulation iii Disconnect between the ones who benefit and who don t 0 Tend to respond to only media scares i Usually wait until media presents a big scare ii Slows down the process 2 Private Regulation a profitability depends on the efficiency of their regulations i constantly updates standards adds dynamic changes ii Focuses on Customers preferencesvalue vs efficient cost of facilitating ii Ex Best Western constantly updates inspection lists in customers favors b People that benefit from regulation pay for it i You pay for it cuz you are interested Direct link ii Direct relationship between the ones who pay and the ones who benefit 0 Based on the need for regulation from within the industry i always talking to evolve change and be up to date ii Moves very quickly relative to Public regulators 3 Private Regulations are actually going on out in the world we were just not aware of them LEED certification of qualified buildings private a Profitable because LEED leads to higher rent rate purchase rates Ef cient Regulation 1 How much regulation is efficient Compare the value and the cost a individuals benefit from ensuring safety in consumer products and working conditions b However each level of safety is costly to obtain i ex Compliance cost regulatorsincurred costs etc 2 So is it efficient to obtain 100 safety NO a No it is efficient to enact only the regulations that are more beneficial than costly i is it efficient to disallow any pollution to the air b Regulate to the point where Marginal Benefit Marginal Cost i Usually Marginal cost is gt Marginal Benefit Efficient Amount of Safety MB 6 escape doors Regulation 400 Insect Fragments 1 Six escape doors in airplanes why not 78910 Marginal benefit of adding another escape door Given 300 passengers Having 1 door MB of rescuing 3001 people will eXit through the door Having 2 doors MB of rescuing 3002 people will eXit through the second door Having 3 doors MB of rescuing 3003 people will eXit through the third door Having 4 doors MB of rescuing 3004 people will eXit through the fourth door i the valuation of each additional door decreases as the number of escape doors increase ii Finding the sweet spot the efficient of doors is the key part to establishing efficiency 6 doors where MC MB 2 400 Insect Fragments Is it efficient to have the gov mandate that 100 of insect are taken out from your food No Cuz it s too costly i Not everything in your bowl is not cinnamon ii USDA sets Food Defect Action Levels 400 bugs 50g iii If USDA finds more defects than their levels they shut down the business iv As long as the defects stay under USDA standards the food is good to go v The cost to have the inspector to filter all the bugs is very costly i As long as the food filters enough insects that the remaining of bugs are harmless to human body it s efficiently good to go It is not efficient to have all the bugs removed when our body can endure a certain of insects Additional Social Pressures l Socially Minded NGOs will take action whenever they believe public and private regulation are insufficient at ensuring quality i Both GOV and PRIVATE regulators have failed to satisfy you EX Nike s Private and Gov regulations both failed to improve the working condition ii This is when Activists come into play its role to make real changes 2 When reading the Nike Case pay attention to the notion of public regulation private regulation and NGO pressure as all three are intertwined within the case i Both private amp Public regulation does not satisfy activists Case 6 Starbucks 1 Starbucks has been committed to social responsibility since its inception Does this mean that it has never strived to be profitable In other words does social responsibility contradict the notion of being profitable Starbucks Mission Statement Establish Starbucks as the premier purveyor of the finest co ee in the world while maintaining our uncompromising principles while we grow The following six guiding principles will help us measure the appropriateness of our decision 1 Provide a great work environment and treat each other with respect and dignity 2 Embrace diversity as an essential component in the way we do business 3 Apply the highest standards of excellence to purchasing roasting and fresh delivery of our coffee 4 Develop enthusiastically satisfied customer all of the time 5 Contribute positively to our communities and our environment 6 Recognize that profitability is essential to our future success Last yet still important A Super High cost mission amp Business model Community giving Pay more for the bean Get financing to Farmers Go after little farmers so that Starbucks can talk about them when Marketing Philanthropy Great Labor Great Employee benefits Great Pricing for purchasing supplies B Profit Drivers To leverage the above costly factors Brand Leverage point i Loyal Customers regularly Visiting once a day increased volume relative to competitors ii Price Gauging Higher Markup Factors allow Starbucks to cover up the high supply cost Less iii Loyal Customers Less Price Sensitive inelastic to higher price because they know that money goes to good cause i Never factchecking on where the money goes Socially Responsible Investors SRIs i Dow Jones Sustainability Index a leader in practicing sustainability ii Footsie for Good Index iii Provides access to rich investors Employees Best company to work for Happier and more Productive i Usual employee turnover rate 220 turn over l 100 employees leave and a 100 new employees come in 2 100 employees leave again and 100 new employees come 3 20 employees leave and 20 new employees come ii Starbucks employee turnover rate 60 l 40 out of 100 employees still remain loyal 2 Avoid a lot of training costs production at lower cost 3 Maintain productive employees who are already trained C Therefore Starbucks Socially Responsible high cost model does not prevent Starbucks from generating profits 2 Within the case Global Exchange chose the issue of fair trade coffee What is fair trade coffee What made Starbucks a strategic target for Global Exchange What other targets could they have chosen and would any others be as strategic as Starbucks A Background Global Exchange showed up at an investor meeting and threatened with a national boycott on Starbucks coffee to make Starbuck comply with Fair Trade Coffee standards B Fair Trade Coffee TransFair USA defines Fair Trade coffee according to five basic guidelines 1 A Fair Price Producer cooperatives are guaranteed a fair price a oor price of 126 per pound for regular coffee and 141 for certified organic coffee or 5 cents above the prevailing market price i High price point 126 vs Starbucks 120 6 cents away from Fair Trade 2 Democratic Organization Producers must belong to cooperatives or associations that are transparent and democratically controlled by their members i Let s not have small farmers left out Let s give equal voice for coffee supply 3 Direct Trade and LongTerm Relationships Importers must purchase coffee directly from Fair Trade certified producers and agree to establish longterm and stable relationships i So that Small Farmers have constant buyers 4 Access to Credit When requested by producers importers must provide preharvest financing or credit up to 60 each order i to help small farmers financially smooth their income 5 Environmental Protection Producers must implement integrated crop management and environmental protection plans Through price incentives producers are encouraged to work toward organic production i Pesticides use Crop Rotation Sustainable harvesting 0verall message let s treat the small farmers nicely C Starbucks already does more than Fair Trade coffee 1 Pays more than the Industry 120 gt 80 cents 2 Already has good supplier relationships 3 Already has longterm contract 4 Already go after small farmers 5 Already has local community outreach Starbucks Fair trade coffee Without calling itself Fair D Is Starbucks a good targ 1 Wellrecognizable brand name i Starbucks Globally Recognized Brand 2 Firms that have a leadership position in the industry i Starbucks Leader in the Industry Highest Market Share in Sales Stores 3 Consumer product firms downstream firms i Starbucks the one pushing the coffee at the end right next to customers ii Store Front Easy to deliver message standing in front of Starbucks Stores Great foundation for the Boycott 4 Firms producing products with lowswitching costs i Go to McDonald Dunkin Doughnuts Brew at home 5 Sometimes the worst offenders are targeted but not always i Starbucks Worst Offenders ii Starbucks Leader Target the easiest one to change so that the other industry will follow 6 Firms that have shown interest in the NGO s issue in the past i Starbucks Corporate Mojo is what GE is talking about Result The best target for Global Exchange 3 What were the costs risks and bene ts rewards surrounding the issue of Starbucks moving to fair trade coffee Think about all the stakeholders in Starbuck s business model when trying to assess the risks and rewards to the change Risks Reward Consumer Risks The Biggest Reward 1 Higher Price 120 to 126 Stop the Boycott 2 Low Quality Low Taste gt ltquotltquotltSelling a lower quality at a higher price high risk Suppliers Risk Enhance Corporate Reputation 1 Loss on Current Suppliers More SRIs More Loyal Employees 2 Immature New Suppliers Consumers Audience Switching from Current to New uncertain of capability Quality amp Quantity Exposing Weakness Potential for a new Market First mover advantage More NGOs Targeting leader in new market More Possibility for Future longterm Visionpotential Assuming NGO target that Quality is controlled certification processes are under control supplier relationships are established early etc Not directly mounting yet but an opportunity 4 Given the risks and rewards potential with fair trade coffee weigh the merits of each of Starbucks options in responding to the demands of Global Exchange amp Do nothing and ignore the campaign amp L Fight back and actively defend your position Starbucks does not have a defendable position Even if Starbucks argues with the best parts such as We are doing as well as the Fair Trade yet we just are not certified We already have high standards so Don t push us But Activists can always say to the Public Look at Starbucks Starbucks will not pay 6 cents to help farmers Seriously degrades Starbucks Principles Media is always on NGO sides Public distrusts Corporates more than does NGOs 50 gt 30 Starbucks cannot win the Public Relation Battle Starbucks does not have a defendable stance Harder to change the game Option a amp b are too risky gt quotquot quot Usua1 NGOs tactics to speed up the rateprocess of change snow balling c Negotiate for a compromised agreement How did Starbucks negotiated Trial period of 1 yr once per month totaling 12 times vear only in domestic shops Got rid of all the Risks by negotiating Risks How did Starbucks Avoid the Risks Consumer Risks Serving FairTradeCoffeeonly 12 times can 1 Higher Price 1 20 to 1 26 create a penetratlon prlcmg story and offer them at the same price Although the quality still remains a 2 Low Quality LOW Taste problem can t do much about that gt ltquotltquotltSelling a lower quality at a higher price high risk Suppliers Risk Complying to 12 brews using immature Fair 1 LOSS on Current Suppliers Trade Coffee supply chain at doesn t hurt Starbucks that much There is enough bean to make 12 Fair Trade Coffee brews 239 Immature New supphersz And because Starbucks is only brewing 12 times year out of 365 days Starbucks still gtxltgtxltgtxlt Switching from Current to has 36512 brews enough supply chain space to accommodate current supphers New uncertain of capability relationships Quality amp Quantity Result No one is unhappy Exposing Weakness Considering Global Exchange s significant power historically changed NIKE and other corporations MOI C NGOS Targeting Starbucks managed to negotiate with Starbucks with minimal compliance This ak St b k 1 k t More Poss1b111ty for Future m CS ar C S 00 S tong NGO target Only got lreward 3 Reward How Starbucks negotiated to gain rewards The Biggest Reward By negotiating with minimal Stop the Boycott compliance Starbucks earned an easy lyr period to plan for riskless future Enhance Corporate With the minimal compliance negotiated Reputation Starbucks can t really claim itself as a More SRIs socially reputable corp More Loyal Employees Global Exchange is not going to be jazzed about the minimal compliance 12 brews don t make Global Exchange happy Employees also already know about the main purpose of the minimal compliance With the minimal compliance 12 brews it is not enough for Starbucks to get the new market Starbucks didn t do anything besides saying yes to 12 brews for one year trial period Consumers Audience Potential for a new Market First mover advantage leader in new market longterm visionpotential Assuming that Quality is controlled certification processes are under control supplier relationships are established early etc Not directly mounting yet but an opportunity When conducting Crisis Management most of the companies only focus on avoiding the risks and they are happy Starbucks did more than iast avoiding the risks Proving its social strategy ninia appearance Since facing the Global Exchange campaign Starbucks has increased its investments in fair trade coffee for example it has collaborated with Oxfam America CEPCO and the Ford Foundation to make advancements in fair trade coffee Given that world demand for fairtrade coffee is stagnant is this a strategically sound decision Created collaboration with activists with the mission 1 Let s work on the new Fair Trade Coffee market to enhance technology productivity amp nancial stability 2 Let s also help them grow and produce better quality coffee beans I Reward I How Starbucks negotiated to gain rewards I The Biggest Reward All of a sudden you have three activists willing use their Stop the Boycott own resources to work with Starbucks collaboratively Global Exchange can no longer come to Starbucks and threaten with boycott strategy It is costly for Starbucks to work with the three activists groups but it is also costly for Global Exchange to threaten since now Global Exchange has three additional groups to threaten with on top of Starbucks Further provides shield for potential boycotting Very strategic A strong statement saying to Global Exchange Hey sit down Let us Starbucks Activists take over from here Further mitigates the risk of being boycotted Enhance Corporate Reputation As Starbucks pours more money into the new market More SRIS Starbucks gets assessedreassessed as a new leader Starbucks gained financial aids from the collaborative activists group in becoming leader More Loyal Employees Consumers 7t Audience Potential for a new Market With the partnerships with the 3 Activist groups Starbucks First mover advantage now had the right to claim itself as a socially responsible corporation l r in n m k eade CW at at Starbucks Voluntarily took a costly action to develop the longterm visionpotential Assuming Faquot Trade Come Compllance Starbucks will be able to excitingly share the stories about that Quahty ls Cantmlled iertlflcitlon how they not only went with the Fair Trade Coffee but also Processes are un er comm Supp 16f developed Fair Trade Coffee into better states I ClatiODShiPS are CStabliShed SRIs Employees Consumers are J azzed early etc Not directly mounting yet but an opportunity Lesson They didn t just stop at avoiding the risks they created a new opportunity which was signaled by Global Exchange The coffee market maybe moving to a different direction and maybe Starbucks want to move with the moving market by partnering with the activist groups and got the leadership position in the new market Unlike Citigroup and Nike who tried only to avoid risks Starbucks took a completely different direction Takeaway from Starbucks 1 Socially responsible companies are likely targets but also attractive collaborators 2 Don t wait for a crisis to collaborate 3 Think strategically about relationships with NGOs 4 Recognize that collaboration comes with some compromise 5 Appreciate the value of the NGOs independence 6 Understand that building relationships with NGOs takes time and effort 7 Think more like an NGO by using communication strategically Case 7 Citigroup 1 Why did RAN target Citigroup Think about the characteristics specific to Citigroup that made them a viable target Could RAN have looked at other targets than banks like logging companies or government regulators Would these nonbank targets be more or less effective Citigroup Project Finance Financing a project i Financing a Company In case the project fails the bank is only responsible for the debt incurred during the projects Growing Industry Project Finance gaining popularitytrend 379 billion 400billion Industry Leader in the Market Small in percentage due to numerous competitors but still a leader i Annual 111 billion Revenue 13 billion Profit very profitable industry RAN Operating under 2 million budget Two dozens of 24 employees Three departments operations development fundraising amp Campaigns Targeting Why Citigroup Globally Well Recognized Leadership position Already in attempt to differentiate from competitors with social responsibility concept i Citigroup s new mojo live richly amp money is inst means to meaningful life yet Citigroup s few projects were going against the mojo Rich Budget capable of evoking change holds the capability to adopt changes Consumerbasing Bank 56 billion l3billion comes from consumer basing products more customers to in uence to hit Citigroup Why Banks instead of the actual companies doing the damag Nonbank companies if targeted the impact is delivered only to the company itself Banks if targeted a Wider impact Will take place since it involves a lot more damaging companies i Given that RAN does not hold the capacity to hunt one company after another targeting a bank is much more effective and efficient 2 Think about tactics of RAN and what RAN did correctly in this campaign Targeting and Leverage points RAN focused on and think about the demands that RAN placed on Citigroup Is RAN nding effective leverage points Is RAN making reasonable demands a Two demands from RAN Ran Proposed Very Reasonable Demands a Recognize your role in the problem see that project finance involves you in the problem b Take actions to decrease at stop project finance the destruction in Harms b Tactics Wisely Selected Leverage Points RAN did their research College students Credit cards widely offered to college students longterm loyal customers i Columbia Uni ID cards with Citigroup Logo 4000 Columbia students sign up for Citigroup annually steady ow of business ii RAN Convinced students Customer boycott Cut potential employees CEO Sandy Sent 500 letters written by school kids in attempt to in uence Citigroup s internal decision makers CEO CMO Chief of High Efficienteffective Labor Media HUGE leverage point for RAN Day of Action Singing Oil Wells in Jingle Bells tune easily grabs attention of Media On News for FREE RAN is not rich needs free advertisement RAN knows how to costefficiently take leverage points Very strategic RAN knew more than Citigroup Community Relations Vice President No experience in Project Finance amp Solving problems with NGOs on this Issue Dealt with public interviews better than did Citigroup The biggest weapon NGOs have against corporate relationship with PUBLIC Experiences from Historical campaigns allowed RAN to plan effectively for future campaigns Things to Know Before Updates 1 Given the risks and rewards potential with project nance weigh the merits of each of Citigroup s options in responding to the demands of RAN a Do nothing and ignore the campaign till it goes away b Delay Negotiate over minor changes c Enter into some negotiation over more significant change 1 Pull out of funding environmentally destructive projects Citigroup s VP of Community Relations takes in charge of dealing with RAN So far 1 Met with Ran talked and stalled Delay delay delay option b 2 Not enough information to find the solution Crucial information for decision making Citigroup needs to figure out how much of the impact is being imposed on Citigroup to decide on taking the appropriate decision How much impact does the campaign have on Citi s business Examples of leverage points 1St year Annually 4000 columbia students register for Citigroup cards 2nd year annually 300 3rd year annually Observation of less and less new accounts incoming Stock Price Drastic Decrement Cost of changing the structure If none of the above leverage points are showing a significant indicator there is no reason for Citigroup to conduct changes 2 Two outside events occurred in 2002 a Enron Scandal General Public distrust towards corporates increased drastically more bias against Citigroup i General Effect public s trust towards corporates dropped ii Public Customer and Media biases increase iii Disadvantage for Citigroup holds the potential risk of being affected by the general distrust towards public iv Advantage for RAN a nice shock RAN can enjoy to leverage against Citigroup Corporate b Jack Grubman CitigroupSalomon Smith Barney Analyst biased research scandal i General effect Degrades Citi Brand ii Citigroup is willing to finance dirty projects because its profitable iii Grubman biasresearched because its profitable ii iii Citigroup trains its employees to do dirty stuff to only gain profits Grubman biasresearched to go after profits W Citigroup s Mentality Only sees profits a amp b provided RAN a huge momentum to establish a new foundation to really hit Citigroup hard Updates after the Case 1 CEO Sandy Weill targed heavily in 2003 a Home Town Showdown at Greenwich Connecticut Weill s hometown putting up Wanted posters of Weill during the CEO s Highschool Reunion embarrassed Sandy b Reunion Cornell class of 55 Make us proud Stop funding destruction c Instead of previous 500 got 2500 letters from children across the US asking him to stop funding global warming and forest destruction 2 Robert Rubin former Treasury secretary and Citigroup board member targeted at Columbia University a RAN How can you justify a pipeline through the Ecuadorian rainforest b Rubin The pipeline is not a Citigroup project c RAN Isn t it true that you are funding it 1 Rubin Yes we are funding it i Implication recognize your role Made Rubin a fool Decreasing his public appearance 3 Celebrity and NYU market paid for the entire program Susan Sarandon Ed Asner and Daryl Hannah cut up their Citigroup cards on a NYC TV commercial Free Awareness raiser 4 Late 2003 RANCitigroup entered into a cease fire and eventually Citigroup adopted the Equator Principles EPs 6 Weeks of negotiation and another 6 weeks of solution seeking i The EP Does not determine DOS and Not DOS They only classify projects based on risks and require X amount of risk assessment to be done with each project type ii The shittier the project the more costly to run the risk assessments a The Equator Principle were developed by World Banks and the International Finance Corporation to establish environmental and social impact risk assessment standards applicable to project finance b RAN applauded Citigroup s efforts but asked for more 5 2004 New Citigroup CEO Chuck Prince announced Citigroup s operation change adopting standards that go beyond the EPs a Citigroup would report confidential information on all its project finance activities to RAN on a quarterly basis Why 1 Risk mitigation a To look more transparent b To collaborate instead of fighting to make RAN an internal ally instead of an external enemy 2 Opportunity discovery a Cigitroup sees a lot of things that they didn t see before collaboration with RAN b RAN risk assessmentmitigation advisor amp consultant c environmental risk financial risk especially project finance 1 RAN Free consultancy lowers the cost of conducting changes 6 Citigroup can t do their environment homework very well f Competitive advantage peer institutions do not have experts assessing risks Case 8 Nike How was Nike s operation different from other sports apparel producers Why were Nike s practices under criticism What were the major concerns of the labor activists Nike s different operation model 100 out sourcing Overseas no in house production cheap Raw materials labor conditions to save on production costs Other competitors have same contractors Tenner Shoes commodities same factories same materials Despite commodities seller just like Starbucks did Nike built up its brand using all the savings from out sourcing to acquire Celebrity endorsements Picked the best athletes in each sports Michael Jordan Tiger Woods Jerry Rices Differentiating factor able to increase pricing Why under criticism 1 Low amp unfavorable working condition casualties death of workers due to machinery malfunction 2 Low minimum wages training wages below minimum wages 3 Low minimum age workers from western perspectives yet the ages were legally appropriate in local Maior concerns of labor activists Not specifically given but Prof Kreft said it So it s important 4 Unfair profits low production AND high price markup to acquire celebrities i 44000 yrs to work to catch up the celebrity income ii Pay nothing to the workers and pay millions to celebrities Did any of the labor activist s criticisms apply directly to Nike s operations What made Nike a strategic target for the activist were there other viable targets Was it fair to target Nike for labor abuses given its unique business model Criticism directly apply to Nike s operations No Other companies were in the same The rest were involved in the same problem but Nike Leader amp Nike denied and claimed not accountable for the issue Reason for Nike being the target other potential targets 1 Wellrecognizable brand name 2 Firms that have a leadership position in the industry 3 Consumer product firms downstream firms 4 Firms producing products with lowswitching costs 5 Sometimes the worst offenders are targeted but not always 6 Firms that have shown interest in the NGO s issue in the past Starbucks Citigroup Nike all have the above six characteristics Fair to target Nike for Labor abuses regarding its unique business model Two different views 1 From Nike s view denial not responsible it s the responsibility of the independent contractors the local government s fault not to regulate VS 2 From Activists view If laborers form union and protest and make things difficult for Nike to operate under costefficient conditions will Nike still operate No because Nike s business model depends on such cheap labor conditions Nike s sole business model depends on evil unfair business practices Nike Migrator in search of cheap resources 3 Result It s not the matter of fairness the two opposing Views tell us that both parties have legitimate reasons Nike was just targeted for Activists convenience sake Therefore Nike should have done something to mitigate the risks like Starbucks did But it didn t What was Nike s initial public relations response and was it adequate Did Nike eventually do any internal or external monitoring of its business practices during the controversy If yes explain the steps that were taken Nike s initial public relations response amp was it adequate 1 Defensive Denied the accountability blamed all of the problems on third parties independent contractors 2 Aggressive While confronting the boycott Nike increased their celebrity advertisement 3 Result provoked activists to really hit hard on Nike and found one crucial leverage point Marketing Specifically customers Universities college athletes Nike s Key customer segment i Athletes are given with thousands of dollars worth of Sports gears 4 Activists analyzed College students Life time buyers focal points for grass roots movements If college students are convinced they will in uence the rest of the customers i Coaches resigned ii Athletic directors refused to conduct events if Nike sponsored acacacacacacacacacaqb take a defensive Stanee Steps of Internal monitoring during the controversy 1 E amp Y Confidential conducting of auditing But leaked and unveiled the poor working condition a Factory in Vietnam machine blew up poor ventilation Death and disease issues I Activists said you did wrong by hiding truth ii Nike said no that s why we hired EampY to prove that we are still doing alright 2 Dusty Kidd Nike s internal employee to create the code of conduct to raise awareness Steps of External monitoring during the controversy 1 Andrew Young former mayor of Atlanta notable independent brand for civil human rights activist Celebrity and Activist a Given the permission to go anywhere necessary to produce a public report that addresses Nike s working condition i Report Results punch line Nike is doing alright BUT could i should do better ii Activists criticized 1 Nike proceeded celebrity endorsement again Didn t buy the value 2 Andrew only spent 10 days including traveling 3 Fact in suspicion used only Nike translators 4 Unprofessional looking report empty spaces pictures driven effortless 2 Dartmouth Business School Studies Relates to later issue of not Addressing the WAGE issue Dartmouth Business School Studies as Defensive tool i Nike workers i Primary Income earners in their families ii Nike workers actually worked to buy luxury goods Nike We are there to help them support their families Did Nike ever admit labor violations What changes did Nike implement in response to the controversy Did they satisfy all the labor activists demands Nike s admittance of Labor violations Didn t reallv admit 1998 Phil Knights Public Speech Nike has become synonymous with labor abuses didn t directly adimit it i You guys think and made Nike look synonymous to labor abuses and I happened to understand it I am not admitting it You accused me Clever way to put it Changes implemented And then announced critical changes Brought Premium Overseas Standards US standards i Minimum working age 16 apparel 18 sneakers more dangerous to manufacture ii Adopted OCEA clean air amp worker safety standards iii Maximum Working hrs no more than 50 hrs per week iV Training of Managers educated local language to improve communication V Micro loans available for Satisfaction level to labor activists demands 1 Incurred a lot of costs to satisfied the problems 2 But DID NOT address WAGE Issue We are not going to touch it because it s gov s issue not ours Dartmouth Business School Studies as Defensive tool i Nike workers i Primary Income earners in their families ii Nike workers actually worked to buy luxury goods Nike We are there to help them support their families Looking at the case as a whole could Nike have gotten away with doing less Or do you think Nike should have done more Are there any changes you could see in Nike s strategic response to the labor accusations that would have improved Nike s position in the scandal Crisis management person would say a Nike made the mistakes and missed the chance to provide the initial response i aggressive amp defensive and provoked the activists to attack them even harder ii at the time the activists were sending a signal and Nike refused Nike was hit so hard that they are still doing their damage control until today iii If you took the initiatives like Reebok did you would have been the leader in Corporate giving as early as Nike s competitors incurred unnecessary costs to cover up for the damages iii Dug a huge hole and climbed out through Phill Knight s speech to save the SWOOSH b if there is one chance to rewind and do better Nike should have benchmarked what REEBOK did admit it and take it seriously i Realizing the severity of the problems and ask for time to come up with solutions 1 buys time to study more about the issue avoids activists movements ii Cease the opportunity to bring noticeable changes increase standards c Today Nike leader in only after incurring a heavy compensation costs i Fair Labor Membership in AIP ii Corporate giving social giving community outreach and labor giving iii


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