G202 Exam 3
Private Regulation Examples
1) Carfax - information about used cars 2) Best Western - Hotels can use its brand image if it meets quality standards 3) UL - Establishes standards for electrical equipment
Why are there more NGO campaigns today?
1) Communication costs are decreasing (internet) 2) Public trust in corporations is declining (30%) 3) Government bureaucracy is increasing 4) Businesses are becoming global - less jurisdiction from government
Fair Trade Risks for Starbucks
1) Consumers - Low quality - Higher Price 2) Suppliers - Hurts existing relationships - Risk of missed shipments 3) Image - Might look weak, NGOs will come for more
Advantages of Strategic Sustainability
1) Cost reductions due to better internal efficiency 2) First mover advantage 3) Manage regulatory risks 4) Manage NGO risks 5) Enhance brand equity and reputation
Stages of private political issues:
1) Development 2) Politicization 3) NGOs make demands (threats or rewards) 4) Resolution (compromise scale)
Stages of normal political issues:
1) Development 2) Politicization - most powerful spot for activists 3) Legislative - *activists begin to lose voice* 4) Implementation
Public Regulation characteristics
1) Doesn't consider cost of regulation 2) Funded through taxes 3) Tends to respond to media scares
Features of Fair Trade Coffee
1) Fair Prices ($1.26) 2) Democratic Organization 3) Direct trade & Long-term relations 4) Access to credit 5) Environmental protection
Suncor initial investment cons
1) First mover disadvantage - costs 2) High opportunity costs of not investing in oil sands (or alt. energy) 3) Short-term profit drop 4) Risk of government not helping
Incentive Mechanisms to go Green
1) Government Taxation 2) Assign Accountability for Waste 3) Subsidize Green Tech. 4) Tradeable Pollution Permits
Nike's subsequent responses to activists
1) Hired Dusty Kidd for internal monitoring and new code of conduct 2) Brought in EY to conduct a private audit. This was later leaked and activists claimed it wasn't objective due to conflict of interest 3) Andrew Young writes report on Nike. Says they could be doing better, doesn't mention wages. Activists are unsatisfied and claim report didn't meet standards 4) Dartmouth conducted study on wages, found Nike workers are secondary earners 5) Phil Knight gives speech
Nike's reforms after criticism:
1) Increased working age to US standards 2) Improved working conditions (trained managers, max 60-hour work week, OSHA) 3) Offered micro-loans to combat unfair profits. 4) Led AIP and FLA They did NOT ever change wage structure
Cons of tradable permits
1) Initial allocation of permits could go towards political favorites 2) More permits issued than pollution
Why was Nike under criticism?
1) Low Wages 2) Low Worker Age 3) Poor Working Conditions 4) "Unfair" Profit
Pros of tradable permits
1) Overall pollution will be reduced as permits are decreased over time 2) Permits go to those who value them most 3) Low abatement cost firms can gain profits by selling 4) Environmental groups can buy permits to reduce pollution
How did activists attack RBC for financing oil sands?
1) Plea to Mr. Nixon's wife 2) Attacked him at press conference
Private Regulation characteristics
1) Profitability depends on efficiency of regulations 2) People benefiting pay the cost 3) Based on need for regulation
Why did Global Exchange target Starbucks?
1) Recognizable 2) Industry Leader 3) Promotes social responsibility 4) Downstream 5) Already close to fair-trade coffee in price
How did Starbucks' action affect the risks/rewards?
1) Risks - Only 12 less brews for current suppliers - No price change - Shut down boycotts, not weak 2) Rewards - Not a market leader - No reputation changes - Potential to boost reputation if they invest
Why did Greenpeace target Apple?
1) Small Market Share (7%) 2) Apple is an image-based, leading brand
Starbucks Takeaways
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.
Fair Trade Rewards for Starbucks
1) Stops the boycott 2) Leader in emerging market 3) Enhance reputations (SRIs and employees)
Subsidy Examples
1) Tax Credits 2) Grant money 3) Government-Industry Partnerships
What did Greenpeace demand from Apple?
4 step plan to turn the company green. Included take-back plan for hazardous material and a new Macbook line with cleaner materials.
Starbucks progress toward 2015 ethical sourcing goal
Achieved 99% ethically sourced - <2% Organically Certified - <10% Fair Trade Certified - 99% CAFE Certified
Qlow (safety graph)
Additional regulation is profitable since consumers will pay. MB > MC
Who does the media and public side with on issues?
Always the activists
What leverage point did Greenpeace find over Apple?
Apple's biggest customer is the education market (school/universities). Targeted those to hurt Apple's profits
What did Greenpeace target McDonald's for?
Brazilian deforestation. They sourced only 0.5% of soybeans from Brazil but were a good target for the NGOs.
What will taxation do to firm output?
Decrease supply and raise consumer prices
What was Nike's initial reaction to the activists?
Denied accountability and claimed they don't make shoes
Who does the Exxon commercial target?
Employees, SRIs, activists, *Government* NOT consumers
What separated Nike from other sports apparel producers?
First company to outsource 100% of stuff abroad. No production owned by the company. This kept costs as low as possible. They also were the first to own flagship stores (Niketown) and had many celebrity endorsements
Pharmaceutical Drugs - Asymmetric Info.
Good information about secondary health improvements will not be advertised to potential drug customers (due to FDA)
Worker Safety - Asymmetric Info.
Health risks and information about job risks aren't given to workers (popcorn lung) OSHA made to stop this
Should Suncor make the first 312.5 million investment?
Hell. No.
How did Apple respond to Greenpeace?
Introduced new Macbook which avoided the bad materials. Plugged Greenpeace on its website.
What did Suncor do after ICO2N Network broke up?
Joined Canada's Oil Sands Innovation Alliance (COSIA) and continued to shelter themselves (they responded to NGOs by building 2 websites in 10 years)
Did Nike admit to labor violations?
Kind of? Phil Knight's wording was intentionally vague and up to interpretation
External Graph Concepts
MPB = MSB --> Demand MPC --> Marginal Private Cost MEC --> Marginal External Cost (pollution) MSC --> MPC + MEC (social cost) Qe = Pe is best for society Pf = Qf is best for the firm M(profit) = MPB - MPC
What is MAC?
Marginal Abatement (pollution reduction) Costs
Why did Suncor found the ICO2N Network?
Mitigate risks for the whole industry since the companies are stronger together (share tech, lobby together, network shield, threatens banks)
Suncor initial investment pros
NONE!
What action did Starbucks take to address boycotts?
Negotiated for a compromise. Will brew fair trade coffee once a month, for 1 year (12 total)
Case Update on Nike
Nike has made reforms and appointed a CSO. She helped prevent the Bangladesh crisis and saved Nike from paying $1 billion. Helped them gain a competitive advantage over competition due to preemptive action.
Qhigh (safety graph)
No room for private regulation as consumers won't pay MC > MB
Does being socially responsible contradict being profitable for Starbucks?
No. Despite high costs, Starbucks can price gouge and has much lower employee turnover
Did Suncor wind up investing in the network?
No. Due to first mover disadvantage, unwillingness of government to move first, and lack of NGO leverage over them
Which aspect of PEST threatens Suncor the most?
None! All risks are low and will not materialize in the short-term
How much regulation is efficient?
Not 100%. Efficient when MB = MC
Do activists have a leverage point over Suncor/the industry?
Not really. They are trying to target RBC who finances them
What happens when consumers are uninformed of costs?
Over-production, price too high
Result of employees uninformed about job risks
Over-supply (of labor), wages too low
PEST risks for Suncor
P - EU/US threats of regulation E - Alternative energy gaining cost parity S - Activists targeting RBC T - New tech maturing faster than CCS
Used Cars - Asymmetric Info.
Performance problems and other information is not provided to potential consumers Carfax made to stop this
Did activist criticisms apply directly to Nike?
Phil Knight: Nope, we don't own the facilities. Go talk to the country's government or the firms Jeff Ballinger: Yes, they are choosing the contracts, punishing countries for improving, and should be held to an American standard
How did McDonald's respond to Greenpeace?
Put a moratorium on Brazilian soybeans since they only sourced 0.5%; hurt competitors as more of their production was located there
What makes a good target for activists?
Recognized brand name Industry leader Makes consumer products Low switching-costs 'Best offenders' targeted Firms who show interest to social issues *Chance of victory*
What accidental good can come from accountability for waste?
Secondary markets for waste will evolve (Cows eat spent grain)
What is the Coffee and Farmer Equity (C.A.F.E.) certification?
Standard developed by Starbucks and others based on product quality, economic accountability, social responsibility, and environmental leadership
What do Green NGOs do?
Target companies to evoke industry wide movement towards green Some partner, some attack
What did Greenpeace do after defeating Apple?
Targeted Lenovo and HP until the entire industry proactively made changes
Tax Formula
Tax = MEC at Qe
Why would boycotts hurt Starbucks especially?
They are known for their great store environment by customers. Would disrupt this and bring attention to all customers.
Result of consumers uninformed about product benefits
Too little units are produced/consumed, price is too low
Private Politics
When NGO activists directly engage private firms instead of trying to influence normal public policy
Strategic Sustainability
When a firm incorporates sustainable business ventures to increase profits
External Damages
When a firm's production imposes costs on a third party without consent
When does private regulation form?
When consumers perceive that government quality regulations are insufficient (market must value additional regulation over cost of providing it)
Asymmetric Information
When one party in the transaction has more information than the other. This leads to inefficiency
When do NGOs take action about safety?
When they believe public and private regulation are insufficient
Were Starbucks investments in fair trade coffee smart?
Yes -- preemptive action against activists. Gives them a first-mover advantage as well.
Do consumers trust brand names, franchises, and certification labels?
Yes, but the quality must be valued more than associated costs
Could Nike have done less?
Yes. They acted re-actively and defensively. A lot of action was required to save the brand because they weren't preemptive
