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Business Respect - CSR Dispatches No 102 - 3 Sep 2006
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An email newsletter with news and discussion focusing on corporate social responsibility globally, looking at the companies in the news and the emerging issues. Linked to the website at http://www.mallenbaker.net and produced every two weeks.
In this issue, we review a critical attack on Prahalad's case for treating the poorest in the world as customers to alleviate poverty.
In the news:
1. China: Foxconn cuts defamation claim against journalist2. Global institutions join up to focus on supply chain working conditions
3. US: Political donations in the spotlight
4. BP was warned about Prudhoe Bay pipelines four years ago
5. China: Most people assume bribery is normal
6. Apple produces report into sweatshop claims
7. US: Tobacco firms lose lawsuit on fraud
8. World Bank sustainability restructure questioned by campaign groups
9. Pharmaceuticals: AIDS drug makers criticised for failing the challenge
Feature articles on the internet:
1. Has Coke become the new McDonald's? - 18 Aug 2006 FROM The Guardian2. Wal-Mart takes the fight to its critics - 17 Aug 2006 FROM MSNBC (Financial Times)
3. The green machine - 31 Jul 2006 FROM CNN.com
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Topics:
WelcomeCSR News 3 Sep 2006
CSR FEATURES from the internet
Is there REALLY a fortune at the Bottom of the Pyramid?
Want to read a hyperlinked version of this issue? You can find one on the website at http://www.mallenbaker.net/csr/nl/102.html.
Copyright 2006 Mallen Baker. All rights reserved. For information on how to subscribe, go to http://www.mallenbaker.net/csr/nl/subscribe.html
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Welcome
Last issue's article on the business case for CSR provoked quite a lot of response - just about all of which was sympathetic to the contention that it is time to become more sophisticated in this area, and to stop treating CSR as an 'it' - a single thing that can have one business case that will 'prove' the correctness of a proposed course of action in advance.
One of the most thoughtful responses came from Richard Brophy, the CSR Manager for Herbert Smith LLP. Richard contributed the following:
"I think the problem for some of us that not all businesses are yet capable of reflecting deeply enough for CSR to be considered a set of judgments with hoped for rather than expected outcomes. For example, ten years ago, business development in law firms may well have meant a trip to the golf course.
"Now those same firms employ large marketing teams delivering sophisticated client relationship management programmes or campaigns for brand positioning. That change must have taken a lot of pressure, probably, in the early days, from a small amount of people.
"The question is whether there is sufficient drive and energy within the CSR movement to force a similar change - not necessarily so that we suddenly employ teams of 50 when we used to have three, but where CSR is an accepted part of the fabric of the business (whether or not it reaps daily success, which is as impossible for marketing as it is for CSR)."
Thanks to Richard for those thoughts, and to all of you that wrote in.
A couple of years ago, I wrote a pretty positive review, in common with a lot of others, of CK Prahalad's influential work 'The Fortune at the Bottom of the Pyramid'. This has proven to be one of the most influential business books of recent times, so I was interested to see the concerted, well-considered and argued attack on the work recently by Aneel Karnani. It seemed an important and timely debate, so this issue I have reviewed the key points.
The sharp-eyed amongst you may have noticed a three week time lapse between the last issue and this one. Well, even CSR geeks take a holiday sometimes! Although the sharp-eyed of you have probably been taking a well-earned break of your own and not in the least concerned when this newsletter appears! Hopefully all are refreshed and looking forward to a few months crammed with CSR-related achievement to come!
Mallen Baker
mallen@mallenbaker.net
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CSR News 3 Sep 2006
China: Foxconn cuts defamation claim against journalist
Foxconn, whose subsidiary has been recently caught in the iPods 'sweatshop' claims, has slashed a defamation claim against two Chinese journalists to a token one yuan from an initial 30 million.
An official from the company told Chinese news agency Xinhua that the company was aiming to have reversed the court freezing of the journalists' assets, including their homes and bank accounts.
The company filed the suit against the journalists over a report suggesting that most of its workers were forced to stand up for 12 hours a day, leading some to suffer ill health. An online poll showed overwhelming support for the journalists.
Global institutions join up to focus on supply chain working conditions
The International Finance Corporation (IFC), the private sector arm of the World Bank, and the International Labour Organisation are to collaborate in developing a global programme for better labour standards in supply chains.
The Better Work Programme will focus on a variety of sectors, including garments, plantations, electronic equipment and light manufacturing. It will promote the business case for better working conditions.
The new programme follows successful ILO ventures such as the Better Factories Cambodia programme, which has been reporting on working conditions there since 2001, and include strict monitoring and training for factories.
The partnership will focus on creating global tools for labour standards monitoring and remediation systems.
US: Political donations in the spotlight
American companies are finding growing levels of attention being paid to their political donations by investors concerned about the use to which corporate funds are being put.
According to the Financial Times, the issue is likely to become more prominent in the run-up to the November elections since candidates in close races will seek greater funding from companies.
Recent scandals have prompted demands for greater transparency on political contributions, which during the last big election cycle in 2002 totalled $184m.
BP was warned about Prudhoe Bay pipelines four years ago
According to documents revealed by the investigation into the oil spill at BP's oil field in Prudhoe Bay, Alaska, the company received a report over four years ago raising concerns.
The draft report produced by Coffman Engineers, produced in 2001, raised concerns over whether BP was monitoring for corrosion in the pipes sufficiently. After the spill occurred last March, the company acknowledged that the lines in question had not been inspected since 1998.
The critical comments were removed from the final report following feedback from the company.
The revelation comes after growing disquiet, particularly in the US, after the company shut down part of its operations at Prudhoe Bay after leaks and corrosion were uncovered elsewhere.
China: Most people assume bribery is normal
A survey of Chinese citizens has suggested that the majority assume that commercial bribery is a standard part of business practice.
According to a translation of a Chinese story by CSR Asia, about 77 percent of respondents said that they would offer gifts to business partners as part of their sales approach. Less than 10 percent believed that bribery could be eliminated completely.
Around 50 percent believe that measures to combat bribery and corruption will struggle to have a great deal of impact.
Apple produces report into sweatshop claims
Apple Computer has produced a report into operations at its suppliers factories in China that were recently the focus of newspaper sweatshop allegations. The report said that some discrepancies had been found, but there is no evidence of child or forced labour.
The company's audit found that that all workers at Foxconn's plant earned at least the minimum wage and over half the workers received more, with the opportunity for bonuses. There was no forced overtime.
However, the pay structure was found to be overly complex, and has since been simplified, and workers were often working over the 60 hours per week maximum.
The full report has been made available through Apple's website, and news coverage of the announcements has generally been positive in favour of the company's action in the face of the criticisms in a UK newspaper. However, the International Confederation of Free Trade Unions (ICFTU) criticised the report on the grounds that it had not been independently verified.
In the statement on its website, Apple said: "Apple is committed to the highest standard of social responsibility in everything we do and will always take necessary action accordingly. We are dedicated to ensuring that working conditions are safe and employees are treated with respect and dignity wherever Apple products are made."
US: Tobacco firms lose lawsuit on fraud
Leading tobacco companies have been found guilty by a US federal judge of conspiring to deceive the public about the risks of smoking, in violation of racketeering laws.
The ruling by Judge Gladys Kessler will require the companies to take action to prevent future fraud, although it will not result in a major fine as have previous actions.
The companies involved were Philip Morris, RJ Reynolds, Brown & Williamson, British American Tobacco and Lorillard Tobacco.
The action, begun originally by the Clinton administration, focused on the agreement between the companies that they would not publicly seek to make relative degrees of harm to smokers a point of competition between them, so ensuring that the health risks of smoking were not highlighted.
World Bank sustainability restructure questioned by campaign groups
The World Bank's stated plan to fold its environmental and social development units into a department that oversees large infrastructure development has been criticised by some groups as potentially watering down its commitment to sustainability in favour of lucrative large projects.
The Bank Information Centre, a Washington-based group, has said that the potential will be created by the move for the Bank's newly titled Sustainable Development Network to wrongly promote oil and gas projects as being development or anti-poverty projects.
The World Bank has dismissed the claims and said instead that the changes will help to properly embed environmental and social goals into the long term development agenda of the developing world. When it was announced, some key environmental groups such as the WorldWide Fund for Nature (WWF) welcomed it as a step in the right direction.
Pharmaceuticals: AIDS drug makers criticised for failing the challenge
Pharmaceutical companies are failing the communities they serve by their lack of collabroation over combination drugs, according to a new assessment by the Interfaith Centre on Corporate Responsibility (ICCR).
The organisation said that that the companies also needed to do more to develop medicines for children, and to improve overall disclosure on their activities.
The ICCR, which advises ethical investment funds, said that improvement in performance was needed to be able to safeguard the companies' investments in new markets and to preserve the integrity of intellectual property agreements. It said that it recognised that there is a willingness to find a way forward amongst the leadership of some of the companies, but a lack of clarity about what the end point should be.
CSR FEATURES from the Internet
Has Coke become the new McDonald's? - 18 Aug 2006 FROM The Guardian
The muffled phone line made the voice in Lagos sound small and distant but there was no mistaking the sense of determination. Ebun-Olu Adegboruwa, a Nigerian lawyer, was explaining how he intended to take on Coca-Cola, the world's largest soft drinks company.
Wal-Mart takes the fight to its critics - 17 Aug 2006 FROM MSNBC (Financial Times)
John Edwards, Democratic vice-presidential candidate in 2004, was in Pittsburgh this month doing his bit for the party ahead of November's midterm elections to the US Congress. His agenda included addressing a rally against the shortcomings not of the Bush administration but of Wal-Mart, the country's biggest retailer and largest private-sector employer.
The green machine - 31 Jul 2006 FROM CNN.com
"Doesn't it feel good to have this kind of commitment made by the company that you are part of? Don't you feel proud?"
The 800 Wal-Mart Stores employees gathered in the home office for an all-day meeting were used to this kind of rah-rah talk. Top executives from Fortune 500 companies regularly trek to Bentonville, Ark., to pay homage to one of the world's most powerful companies and to shout out the Wal-Mart cheer. This time, though, the cheerleading was coming from an unlikely source: Al Gore.
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Is there REALLY a fortune at the Bottom of the Pyramid?
Article by Mallen Baker
The seminal work by CK Prahalad, arguing the crucial role of multi-national corporations in alleviating poverty by treating the poor as consumers, has been one of the most influential tracts in recent years. Now, a vigorous attack has been mounted on its underlying assumptions and conclusions.
Aneel Karnani, Associate Professor of Strategy at the Stephen M. Ross School of Business, University of Michigan, has produced a critical analysis that not only challenges some of the tenets of Prahalad's thinking - it savages them. Prahalad had defined the 'bottom of the pyramid' (BOP) as being the 4 billion people in the world that live on less than $2 a day. Karnani says: "The BOP proposition is characterized by much hyperbole and very weak research methodology. The fortune and glory at the bottom of the pyramid are a mirage. The fallacy of the BOP proposition is exacerbated by its hubris."
Karnani's attack focuses on three propositions in Prahalad's argument:
1. There is significant purchasing power at the bottom of the pyramid, meaning that companies can make good profits by selling to the poor.
2. Selling to the poor can bring prosperity to the poor
3. Large multi-national corporations can, and should, play a leading role in this process.
First of all, Karnani takes serious issue with assumptions around the potential size of this market. He says that although Prahalad argues that 4 billion people fall into this category, according to the World Bank the numbers are closer to 2.7 billion. Not only that, but Prahalad's estimation that this is a market worth $13 trillion does not take into account a number of key facts. First of all, those bottom of the pyramid consumers exist on $2 a day or less - some of them quite a lot less. So the average figure is closer to $1.27 - and if you take into account the effect of exchange rates, the size of that market falls to around $0.3 trillion - which now compares rather less favourably than, for instance, the $11 trillion size of the US market.
Secondly, he believes that Prahalad has underestimated the high costs that would be borne by multinationals seeking to serve this market. The costs of distribution are high because these consumers are geographically dispersed, and there is poor infrastructure linking them. Not only that, but very little of that small income is actually available to goods producers. The poor spend 80 percent of their income on food, clothing and fuel, leaving very little available for extras.
He attacks Prahalad because many of the case studies used in support of the BOP proposition actually involve consumers who don't fall under the BOP criteria at all. So, for instance, he cites the case of Casas Bahia - whose customers on average earn twice the minimum wage (R$400) - well above the $2 a day threshold.
Likewise, he says, the focus on iodised salt produced by Hindustan Lever is misleading. The product may be technologically more advanced than the alternatives, but its higher price than some of the others has led to poor penetration of the product amongst the poor.
Prahalad says that Amul ice cream focuses on serving the poor, selling servings at 2 cents. Karnani says that Amul's website shows that its cheapest offering is at 5 rupees, equivalent to 57 cents.
One of the problems, he says, is Prahalad's insistence that the poor are savvy, value-conscious consumers whose views should be respected and served by companies. Lack of education and the ongoing effects of poverty may often lead people in this situation to make choices that are not in their own interest. In addition, Prahalad's insistence that the quality of the product should not be sacrificed in making cost adjustments to meet the poor's need is a hindrance, not a help.
He says that, unless existing producers are all incompetent or grossly inefficient, the only way to significantly reduce prices is to reduce quality, or else to achieve significant improvements in technology.
Karnani quotes the example of Nirma, a demonstrably inferior product to some of the alternative detergents on the market, such as Surf. It was hard on the skin, and could sometimes cause blisters. And yet it retailed at a third of the price of its competitors, and achieved majority market share from consumers for whom the trade off between price and quality was one that they were happy to make. He concludes: "Insisting on not lowering the quality actually hurts the poor by depriving them of a product they could afford and would like to buy".
According to Karnani, rather than focusing on the poor as consumers, we need to view the poor as producers. The only way to help the poor is to raise the real income of the poor, either by lowering prices through lowering quality to provide goods that meet real needs, or through raising the income that the poor earn.
As you might expect, CK Prahalad has responded in robust form to the critique.
Prahalad disputes the charge that his arguments focus on turning the poor into consumers without consideration of their role as active economic agents. The totality of the argument on poverty alleviation includes creating transparent conditions for markets to flourish, a market based approach that includes single entrepreneurs, SMEs, NGOs, cooperatives and MNCs, creating profitable products and services for the BOP market, new business models and creativity and of production and income generation. And yet Karnani has extracted only the focus on treating the poor as consumers.
He also restates the view that around 4 billion live on $2 a day or less, citing a World Resources Institute / International Finance Corporation study due to be published in October that confirms the figure.
Karnani has also ignored, in his view, one of the central messages in the thesis - not that it is easy for companies to serve existing needs amongst the poor, but that there are ways to create the capacity for the poor to consume through measures to make those products available and affordable. This can come through devices such as single serve portions, monthly payments, pay per use, new distribution models and low prices through innovation and improvement in technology.
But finally, Prahalad outlines that there is a fundamental difference in ideology that is worth mention. Prahalad believes in choice - rather than a rich elite deciding for the poor because they cannot decide for themselves. The process has to start for respect for Bottom of the Pyramid consumers as individuals, and achieving this will take new and creative approaches. Nobody said the process was easy.
Of course, Karnani would presumably respond that respecting choice also means respecting the right to choose lower quality.
This is not a purely academic debate. The thinking behind the 'Fortune at the Bottom of the Pyramid' is generating considerable activity. For instance, the Inter-American Development Bank has just adopted the Bottom of the Pyramid as their focus. A number of companies have begun initiatives in this area, some to a considerable scale. It there is no real market there, it will be a remarkable folly.
What Karnani has certainly achieved is to remind everyone that the challenges in meeting the needs of the poorest consumers are not straightforward. He is wrong to have suggested that Prahalad's argument had failed to recognise this - but it is fair to say that the essential impact of a study can often be reduced in the memory to the simplest components, and this would be a mistake. The approach to the Bottom of the Pyramid is about creating the conditions for a growing and thriving economy, not just about selling single sachets of soap.
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