Lecture 2:Sustainability & Ethics More than just a public relations statement…

Global Business Management

Global Business Management

Outline of the Seminar12:30 – 4:15 - Seminar Session #2• An actual case• The Mefford Argument• An Applied Case – Multinational

4:15 – Seminar Evaluation

Relating logistics management and supply chain management to supplier networks and marketing channels

Source: Dr. Sweta Thota

Or Business (B2B)

MCGRAW-HILL/IRWIN - COPYRIGHT © 2008 BY THE MCGRAW-HILL COMPANIES, INC. ALL RIGHTS RESERVED.

Global Distribution

Value Chain Management

Channel Management

Distribution Channels

Value the relationships for the long-term

Sustainability

https://www.youtube.com/watch?v=_5r4loXPyx8

The Fortune at the Bottom of the Pyramid

Recent thinking and practice in management has challenged the widely held view that the role of the poor…is to exercise our generosity

Bottom of the Pyramid = the 2.7 billion people who live on less than $2 a day.

“Serving the World’ Poor, Profitably”

Poverty gap at $2 a day (PPP) (%)

2008-2012

Poverty gap is the mean shortfall from the poverty line (counting the nonpoor as having zero shortfall), expressed as a percentage of the poverty line. This measure reflects the depth of poverty as well as its incidence.World Bank, Development Research Group.

Global Business Management

The Problem“the critical barrier to doing business in rural regions is distribution access.”

Today’s marketing literature assumes a developed world marketplace of intense competition and a highly developed communications and distribution infrastructure.

The developing world, particularly its rural markets, is almost entirely ignored.

What can be Done?

How do customers in developing countries get access to products and services?

Over coming this barrier is called socially responsible distribution

The Distribution Challenge

After an order 2 months ago the book is delayed again….

Socially Responsible Distribution Strategies

- Describes initiatives that provide poor producers and consumers with market access for goods and services by helping neutralize the disadvantages they suffer from inadequate physical links to markets, information asymmetries, and weak bargaining power.

- Governments, civil society, and the private sector can all play a role in providing

Taking Costs Out

Reinventing the

Distribution Channel

Taking the Long-term

view of investing for the future

Creative Market-Based alternatives identified

Global Business Management

Three-quarters of India’ Poor lives in rural areas and 87%+ lives in poverty (less than $ day)

Cost of a Cup of Coffee…

“Socially Responsible Distribution: Strategies for Reaching the Bottom of the Pyramid”

The Problem“the critical barrier to doing business in rural regions is distribution access.”

Today’s marketing literature assumes a developed world marketplace of intense competition and a highly developed communications and distribution infrastructure.

The developing world, particularly its rural markets, is almost entirely ignored.

What can be Done?

How do customers in developing countries get access to products and services?

Over coming this barrier is called socially responsible distribution

Barriers to Market

Physical Information Institutional

Socially Responsible Distribution

ITC LimitedITC committed to significant enhancement of its rural distribution by investing in a chain of mini-malls to sell a range of goods and services

• Provides real-time information to farmers

• Technology is used to redefine power in the distribution channel…however it did affect intermediaries

• Developed trust….with the farmers and the community

Different than the Mall Strategy?

Gyan Shala

• NGO – Non Government Organization

• Example of a non-profit entrepreneurial startup.

• Illiteracy is a significant barrier to enhancing welfare at the Bottom of the Pyramid

Department of Posts - India

• Rural population’s ability to benefit from India’s growth, industrialization, and development is seriously compromised by poor communication and distribution links

• Given the difficulty in ensuring break-even operations in rural areas, the DoP has extended the reach of its network by relying on private entrepreneurs who offer a range of postal services from their own private premises.

Leveraged Distribution – An Evolution

Setting up Rural Distribution• Develop a scalable delivery system• Setup strong centralized service design, supervisory, and control systems• Cluster retail locations• Develop benchmarks for retail locations• Derive higher volume by share distribution• Engage the community to facilitate entry• Select trustworthy retail representatives• Carefully adjust price and features

Will this Approach Work for Corporations?

• What are thoughts and examples?

• What type of products?• What will need to change?

Insight“Looking at your business through the lens of sustainability can be a source of tremendous creativity, helping to fundamentally

rethink the nature of your business venture” – Embedded Sustainability

Journal Article – Business & Society Review

“The Economic Value of aSustainable Supply Chain”• Written by Bob Mefford• USF Professor• Makes a case for CSR

to become a key part of operations by how CSR leads to better financial performance

• The paper tries to appeal to a capitalistic society.

Introduction“An economic argument

can also be made for sustainable corporate

actions”

Milton Friedman (1970) makes this argument in his article “The Social

Responsibility of Business Is to Increase Its Profits?”

But what if socially responsible corporate

behavior actually increases returns to

shareholders?

True Sustainability Profit

Planet

People

Global Business Management

This paper

Refers to Sustainability

and CSR as identical….

1. Market Arguments for Sustainable SC Practices

Brand Equity

An important marketing concept implying firms

with strong brand equity develop a loyal and

profitable customer base

Service Profit Chain

Links customer Sat and loyalty in services to market performance

Alien Tort Statute in the US

U.S. firms may even be sued in U.S. courts for their corporate practices abroad.

2. Production Arguments for Modern Production Theory

3. Productivity & Quality Benefits of Employing Lean Product in a Global Supply Chain

Another tenet of the lean philosophy is that if one partner in a supply chain proposes, the others will also benefit, creating a virtuous cycle.

Shared Value Does not attempt to

squeeze suppliers

4. Lean Product Effects on Employee Happiness

A key part of lean production philosophy is that employees are assets rather than costs.

This, of course is not the way in which MNEs using foreign subcontractors think of employees of those subcontractors, an most probably do not think of their own employees in that way either…

Eventually the work will move elsewhere as the country develops economically and wage rates inevitably rise, or the exchange rate moves against them, without productivity gains.

5. Potential Reduction in Financial Cost & Risk Resulting from Sustainable Supply Chain Behavior

6. Benefits of Shareholders of the Firm of Sustainable Practices

“Contrary to the argument often used by firms as they seek the lowest cost source of supply, it may actually result in lower long-term production costs to pursue sustainable supply chain practices”

7. Model of Linkage

If in fact a firm realizes higher revenues, lower costs, and reduced financial risk because of CSR policies, then the market should reward higher profits that are expected to result in the future

8. Consider the Benefits of Sustainable SC to Other Stakeholders

9. Issues Raised & Manager Questions

The firm, as a social institution,

with its powerful influence on

economic activities, has a moral

responsibility to try to better

society.

This argument, although appealing to many philosophically, is unlikely to result in much movement toward greater CSR in most capitalist countries.

Social Activists Capitalist Countries

The Friedman view still dominates in most boardrooms and executive suites…

Many firms are unlikely to change their practices unless they see an economic benefit to doing so or are required by law to change.

It is often difficult to convince a CEO or a CFO on moral arguments alone

Therefore, theoretical and empirical evidence in support of ethical corporate behavior leading to greater shareholder value is useful if one believes firms should increase their CSR efforts.

Friedman Again…

Economic BenefitMoral & Profit

Link NeededMore Work Deeds

to Be Done

Collaborative vs. Compliance Approach is Needed

Compliance Collaborative

Vs.

Collaborative Approach• The collaborative approach involves the buyer working closely with the

supplier to not only see that the code of conduct is followed but upgrading the production system to eliminate the “root cause” of the poor working conditions—low quality and productivity forcing the supplier to compete mainly on price.

• Lean production practices are fully supportive of the collaborative approach and result in a win–win–win situation for the buying firm, the supplying firm, and the workers at the supplier.

• The buyer receives lower cost and better quality products, the supplier increases its quality and lowers its cost through higher productivity, and the workers can share in the increased competitiveness of both firms.

Major Points of the PaperStrategic CSR targets those social issues that are closely tied to the company’s business, providing greater leverage to both increase the firm’s competitiveness and mobilize the firm’s resources and capabilities to benefit stakeholders.

The model proposed in this paper develops some mechanisms whereby CSR practices could lead to increased competitiveness, profitability, and valuation of the firm.

Marketing Channels:

The marketing effects result from

greater customer loyalty and brand

equity, which lead to higher revenue

and profits.

Production Channel

On the production side, the

implementation of lean

manufacturing results in better

working conditions, improved

employee morale, more training and

higher skills, which, in turn, result in

higher quality and productivity,

reducing costs.

Financial Channel

A financial effect occurs because of

the greater predictability of cash

flows and reduced risk, resulting in a

lower cost of capital.

Value Chain Management

Synergy Between the Channels

There are some feedback and interactive effects between these three channels that synergistically produce higher profits and increased

shareholder returns.

More Work is Needed

This model still needs to be tested in its entirety….

How will you contribute to this change in society?

Views of Business on SustainabilityPrevalent View - Cost Best Practice View - Opportunity

Ecological and social factors are treated primarilyDefensively Offensively

In Isolation Systematically – Every Business Decision at every point in every product, service, or process life cycle.

In Terms of Harm Reductions In Terms of Zero Harm and Positive Benefits

As a Niche As Mainstream

Through Trade-Offs (Win – Lose) Through Innovation (Win-Win)

As If They Require Social or Green Price Premiums As If They Must Be Competitively Priced

In Light of Incremental Change In Light of Disruptive Change

As a Subset of Existing Customer Needs As an Entirely new Class of Buyer Needs – Contributing to the Common Good

Source: Adapted from Embedded Sustainability

Global Business Management

Extending CSR (Corporate Social Responsibility)

to a Global Supply Chain

• The 7th International Conference on Operations and Supply Chain Management (ICOSCM 2013)Antai College of Economics and Management, Shanghai Jiaotong University Shanghai, China

June 22-25, 2013

Presented by:Payson E. Johnston, University of San Francisco

Paper Co-Written by:Robert N. Mefford, University of San Francisco

Outline of the presentation• Objective of the research

• Pressures for CSR

• Review of previous research

• Case study of a multinational firm

• Discussion of issues and challenges in supply chain CSR

• Conclusions and a look ahead

Objective of the Research•Review of a Multinational’s sustainability journey is discussed in the context of the theoretical and empirical literature on CSR. Implications for other firms undergoing a similar evolutionary process are highlighted.

Pressures for CSR

Demands from the company’s stakeholders (employees, customers, suppliers, communities, governments, and shareholders (Waddock 2008)

Pressures from their peer companies

Global concerns about the environment

Ratings and rankings such as Fortune magazine’s annual “Most Admired Companies” issue

Non-Governmental Organizations (NGOs)

working conditions in developing countries became evident

Social investors who direct their investment to socially responsible firms

“Enlightened long-term self-interest”(Blake 2006)

There is an increasing body of evidence that sustainability efforts can actually increase shareholder value

(Eccles, et al, 2012; Freeman, et al, 2010; Porter and Kramer, 2011)

Since the 1980’s firms around the world have confronted an array of pressures to become “socially responsible”

….at first the effort was defensive

Several Benefits for Companies to Drive CSR

(Blake 2006; Eccles, el al, 2012; Clark 2007; Mefford 2012)

Increasing Productivity and quality, reducing costs,

motivating employees, mitigating risks,

and increasing brand image

Review of previous research on CSR

•Models for CSR evolution in a company:

• Elementary-engaged-innovative-integrated-transforming (Mirvis and Googins, 2006)

• Social stewardship-social responsiveness-business ethics-global citizenship (Frederick, 2008)

• Protector-builder-innovator (Blake, 2006)

• Risk management-strategic intent-citizenship (Costello and Lozano, 2009)

• Corporate social responsibility-corporate social watchdog-supply chain responsibility (Spence and Bourlakis, 2009)

Lean & TQM Extended to Suppliers

•Similarities to the quality and lean journeys of companies

(Lu, et al. 2012; Gopalakrishnan, et al, 2012; King and Lennox, 2001; Narasimhan and Schoenherr, 2012)

Case study of a multinational firm’s CSR evolution

•Evolution of CSR and the Incorporation of Sustainability into Culture

•Steps Taken to Adopt CSR in the Business

•Future prospects of CSR

Evolution of the MNC CSR Journey and the Incorporation of Sustainability into the Culture

Starts discussing CSR openingly and eventually reporting on CSR efforts

Compliance caused a big shift

Moved beyond brand level discussions to ROI Discussions

CSR starts to Operationalize within the Business w/ Team reporting to Supply Chain Executives

Reducing packaging & more comprehensive take back and recycling of products

Embedded into Design Principles

Suppliers Required to Sign-off on Code of Conduct

Grading of suppliers on their CSR reports /performance & grading of carbon reduction disclosures

10 year period

Steps Learned by the Firm on Adopting CSR in the Operations

1. Moving CSR from the corporate level and operationalizing it through the company

2. Creating the tools and processes necessary to track, collect, and drive

3. Ensuring the finances were/are allocated

4. Look for Win/Win projects (Profit & Society) with positive business ROI: Sustainability

5. Bottoms up grass-roots efforts and top down support are both needed

6. Don’t be afraid to try and fail and try again and again and again

Future Prospects at the Company

Movement of CSR practices into the supply chainDrive for increasing transparency within the

supply chainMove to a system approach to measure

sustainabilityEmbed into the DNA at every level and functionLeverage industry standards and organizationsMove CSR beyond the walls of the company

Comparison of this Company’s CSR journey to Other Companies• Firm has progressed through the stages to corporate citizenship fairly

rapidly (Frederick, 2008 / Costello and Lozano, 2009)• Corporate social responsibility-corporate social watchdog-supply chain

responsibility (Spence and Bourlakis, 2009)…the company is developing programs to move towards that goal at this present time

•Next stage of expansion of CSR to supply chain presents many challenges:

• Cultural differences in views on CSR with suppliers • Power imbalances in supply chain• Small suppliers lack knowledge and resources• Limitations of codes of conduct and audits• Mutual benefit must be emphasized

This MNC has a multi-layered and global supply chain allowing for the “multiplier effect” CSR (Preuss 2005)

Lessons from the quality and lean journeys

• History of the quality and lean movements

• Barriers encountered in implementing quality and lean programs

• Supply chain challenges and solutions

• Collaborative approach emphasizing win-win most effective

• A few firms were successful in spreading lean and quality programs to their suppliers (Mefford 2010, Womack and Jones 1996, Anderson and Skjoett-Larsen 2009 )

Will this approach work for extending CSR to the supply chain?

This Appears to be the Next in the Evolution of CSR

Challenges are surmountablePotential for realizing the dual benefits of improved

profitability and societal impact for all members of the supply chain are huge when one considers the hundreds of suppliers and thousands of stakeholders involved in a global firm

Involves elements of the: “Transforming” stage of Mirvis and Googins (2006) “Global citizenship” stage of Frederick (2008) “Innovator” stage of Blake (2009) “Citizenship” stage of Costello and Lozano (2009) But is closest in concept to the “Supply Chain Responsibility Stage” of Spence and Bourlakis

(2009)

Conclusions and a look ahead

1. The potential of Supply Chain CSR

2. Embedding CSR in the corporate culture and strategy

3. “Shared value” leads to the best results for the company and society

4. Supply Chain CSR will require time, resources, and patience but is achievable…a long term project

5. This is the new frontier of CSR for many global companies

“There is little evidence to suggest that ESCM (Ethical Supply Chain Management) is widely embedded through the supply chain.” (Millington 2008)

Custom Programs in Entrepreneurship & Innovation

How does this Apply to Value Chain Management?

• The channel is were the actions is at…production, marketing, and financial

• CSR is critical in these functions

Value the relationships for the long-term

Custom Programs in Entrepreneurship & Innovation

Relating logistics management and supply chain management to supplier networks and marketing channels

Source: Dr. Sweta Thota

Or Business (B2B)

MCGRAW-HILL/IRWIN - COPYRIGHT © 2008 BY THE MCGRAW-HILL COMPANIES, INC. ALL RIGHTS RESERVED.

Global Distribution

Value Chain Management

Channel Management

Distribution Channels

What did we Learn?1. Be able to identify ways that embedded sustainability can improve value chain

conditions and what are the ethical implications that should be addressed.2. Understand the basics of business ethics and sustainability terminology3. Gain the skills to analyze issues plus make business manager decisions that are

ethical and sustainable and contribute to improving the world in which we live and do business.

4. Utilize the concepts of business ethics to address “gray areas” in the marketplace via a logical and fact-based way that ensures a sustainable business.

1. Be able to identify ways that embedded sustainability can improve value chain conditions and what are the ethical implications that should be addressed.

2 - Understand the basics of business ethics and sustainability terminology

3. Gain the skills to analyze issues plus make business manager decisions that are ethical and sustainable and contribute to improving the world in which we live and do business.

4. Utilize the concepts of business ethics to address “gray areas” in the marketplace via a logical and fact-based way that ensures a sustainable business.

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