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FTMBA Strategic Management

Lecture 3: Strategic Context: Business strategy and society

By Dr. Brad MacKay, Senior Lecturer in Strategy

______________© 2011 MacKay

Agenda

The Rise of CSR

Royal Dutch/Shell vs Greenpeace

Stakeholder Analysis

Strategic CSR

Scenario Planning

Case Exercise and Discussion: Apple Inc.

Learning Outcomes

To become familiar with the rise of CSR and its impact on corporate strategy.

To understand what strategic practices give rise to CSR controversies.

To develop knowledge of how strategy and CSR can become mutually reinforcing rather than mutually exclusive practices

To direct attention towards scenario approaches for understanding strategic uncertainties.

The Rise of CSR

The emergence of a global economy;– NGOs attempt to check the power of MNCs

Linkages between political and economic institutions– UN climate change negotiations

Developments in global communications– NGOs are able to harness the power of ICT to take-on much larger institutions.– It is a semiotic world. Symbols and images are powerful.

The rise of Corporate Social Responsibility– Managers have a duty to both the corporation's shareholders and "individuals and constituencies that contribute, either voluntarily or involuntarily, to [a company's] wealth-creating-capacity and activities, and who are therefore its potential beneficiaries and/or risk bearers.“ – Post et al. 2002.

Source: Bendell, Jem. 2000. Introduction. In Terms for Endearment: Business, NGOs and Sustainable Development. (Sheffield: Greenleaf). And J.E, Post, L,E, Preston and S, Sachs, "Managing the Extended Enterprise: The New Stakeholder View," California Management Review 45, no. 1 (fall 2002): 5-28.

CSR Controversies

Nike faced an extensive consumer boycott after the New York Times and other media outlets reported abusive labor practices at some of its Indonesian suppliers in the early 1990s; RD/S decision to sink the Brent Spar, an obsolete oil rig, in the North Sea led to Greenpeace protests in 1995 and to international headlines;Rio Tinto faced controversy with its Madagascar mine; Pfizer and the pharma industry discovered that they were expected to respond to the AIDS pandemic in Africa even though it was far removed from their primary product lines and markets;McDonalds and the fast-food and packaged food industries are now being held responsible for obesity and poor nutrition.

Royal Dutch/Shell: The Brent Spar Controversy

1991 Royal/Dutch Shell took the decision to decommission the Brent Spar Oil Platform;Feb. 1995 the UK Government granted a licence;30th of April Greenpeace occupied the Brent Spar platform;

Massive media attention;The occupation coincided with the fourth North Sea Conference (Environmental Ministers adopted a motion again Shell’s plans);Faced major protests, particularly in Germany where petrol sales declined; June 20th Shell backed down.

Source: Haridimos Tsoukas. 1999. David and Goliath in the Risk Society. Making Sense of the conflict between Shell and Greenpeace in the North Sea. Organization. 6(3): 499-528.

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The Brent Spar Controversy Cont’d

3 Year “BPEO” Study (Best Practical Environmental Option)

– “On the grounds of reduced technical risk;– the reduced safety risk to the workforce; – the insignificant environmental impact; – and the total cost (£46 million, tax deductible, on-shore disposal

vs £11.6 North Sea disposal. ”

The option also would save the UK government significant funds in tax revenues.

Source: Haridimos Tsoukas. 1999. David and Goliath in the Risk Society. Making Sense of the conflict between Shell and Greenpeace in the North Sea. Organization. 6(3): 499-528.

“…[in the deep ocean] animal life is sparse, and only loosely connected to the main food chain. True, the buoy would have crushed some deep-sea inhabitants when it hit the bottom; the cloud of sediment raised by the impact would have smothered others. Yet, having been stripped of most of its contents (including light bulbs) by Shell, the Brent Spar contains only small quantities of pollutants: a residue of oil; perhaps 100 tonnes of sludge; some heavy metals; and some radioactive salts.

In the still depths the pollutants might well have leaked out only slowly, perhaps too slowly to kill many more animals. The level of radioactivity would have been ‘equivalent to what you’re exposed to in any city with granite buildings”

~ says Alasdair McIntyre of Aberdeen University

Source:Source: The Economist 24th June 1995: pp. 110The Economist 24th June 1995: pp. 110--111111

“On the face of it, it seemed a massively uneven contest. The Royal Dutch/Shell Group had global sales of £84.3 bn last year. It employs 106,000 people in more than 100 countries. Greenpeace had a global income of $131 m last year, some 0.001 percent of Shell’s. It employs about 1,000 people and has offices in 30 countries.”

Source: The Independent June 21st 1995: David’s Great Victory Over Goliath

Royal Dutch/Shell: The Nigerian Controvery

Movement for the survival of the Ogoni People (MOSOP)

– Protested about Shell’s operations in the Ogoni region;– Protested over environmental degradation, oil spills etc.– Little revenue from Shell’s operations in the Ogoni region was making

it back to local communities;– Shell withdrew from the Ogoni region in 1993;– In November of 1995, the Nigerian government executed the chiefShell critic, writer and prominent Ogoni leader Ken Saro-Wiwa and eight others;

– Anti-Shell protests erupted all over the world.

Impact on Shell

“Shell is undergoing fundamental change… We have learned the hard way that we must listen, engage and respond to our stakeholder groups”

~ Sir Mark Moody-Stuart, chairman of the Committee of Managing Directors

• Shell engaged in dialogue with a number of stakeholders. • Shell’s statement of general business principals was amended to include human rights and sustainable development;

• A Social Responsibility Committee was established at the highest echelons.

• Changed Shell’s expansion strategy;• Shell made a foray into renewable energies

Stakeholder Mapping

Firm

Suppliers

Government

Local Community

InternationalOrganizations

Employees

NGOs

Trade Unions

Buyers

OwnersInternational

FinancialInstitutions

Source: Mellahi, K. Frynas, G. Finlay, P. 2005. Global Business Management. P. 108.

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Royal/Dutch Shell Stakeholders

FinanceFinance

International Financial International Financial InstitutionsInstitutions

AuditorsAuditorsAccountantsAccountants

AnalystsAnalysts

Individual Individual InvestorsInvestors

BrokersBrokersBanksBanks

ShareShareRegistrarsRegistrars

InstitutionalInstitutionalInvestorsInvestors

Export CreditExport CreditAgencyAgency

HumanHumanResourcesResources CurrentCurrent

EmployeesEmployees

Future EmployeesFuture Employees

Human ResourceHuman ResourceManagement Management ConsultantsConsultants

TechnologyTechnologyProcurementProcurement

Universities and ResearchUniversities and ResearchInstitutionsInstitutions

ExternalExternalAffairsAffairs

NGOsNGOs

GovernmentGovernment

Political RisksPolitical RisksAnalystsAnalysts

EnvironmentalEnvironmentalAnd CommunityAnd CommunityRelationsRelationsConsultantsConsultants

SponsoredSponsoredCultural Inst.Cultural Inst.

Political Political LobbyistsLobbyists

Advertising/PR AgenciesAdvertising/PR Agencies

Trade Trade AssociationsAssociations

SupportSupportServicesServices

SolicitorsSolicitors

IT ServiceIT ServiceProvidersProviders

Source: Mellahi, K. Frynas, G. and Finlay, P. 2005. Global Strategic Management.

Stakeholder mapping: the power/interest matrix

A

Minimal effort

B

Keep informed

D

Key players

C

Keep satisfiedHigh

Low

Level of interestHighLow

Power

Source: Johnson, Scholes and Whittington. 2004. Fundamentals of Strategy. And Mendelow, 1991Proceedings of the Second International Conference on Information Systems. Cambridge

Stakeholder Analysis’ Limitations

LIMITATIONS

• In the volatile and quickly changing business environment, managers cannot be sure about either stakeholders or their demands;

• Stakeholders can change their demands;

• Stakeholder analysis only works if you have perfect information (I.e. is Greenpeace or another group planning a campaign?)

ALTERNATIVES

• An alternative is to focus on issues that may become a threat to an organization (I.e. is there a public debate happening about a specific issue?);

• Develop “Early Warning Systems” (EAS) for scanning the business environment.– Consumer research on trends;– Systematic information-gathering;– Information dissemination in the firm;

Source: Quoted in Mellahi et al. 2005. Global Strategic Management. Oxford

CSR and Strategic Learning

1. Defensive: It’s not our job to fix it;Royal Dutch/Shell denied responsibility for the emissions of its products;

2. Compliance: We’ll just do what we have to;Nestlé was criticised for its infant formula in Africa and changed itsmarketing strategy;

3. Managerial: It’s the business stupid;Nike agreed on global standards AND changed its procurement incentives that encouraged buyers to secure bonuses by circumventing code compliance to hit targets;

4. Strategic: It gives us competitive advantage;Automobile companies like Toyota know their future depends on producing environmentally friendly automobiles;

5. Civil: We need to make sure everyone does it;Alcohol producers like Diageo know that if the whole sector doesn’t promote responsible drinking, governments will legislate more restrictive practices

Source: Zadek, S. 2004. The path to corporate responsibility. HBR. December.

Mapping Organisational Learning

Civil

Managerial

Strategic

Compliant

Latent Emerging Consolidating Institutionalized

Defensive

Issue Maturity

Stra

tegi

c Le

arni

ng

Risky Red Zone

Opportunity Green ZoneDiageo

Toyota

Nestlé

Nike

RDS

Source: Zadek, S. 2004. The path to corporate responsibility. HBR. December. Source: Porter, M. & Kramer, M. 2006, Strategy & Society, HBR, December. 77-92

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Strategic CSRToyota’s response to concerns over automobile emissions;Urbi, a Mexican construction company, prospers by building housing for disadvantaged buyers using novel financing vehicles such as flexible mortgage payments made through payroll deductions; Crédit Agricole, France’s largest bank, differentiats itself by offering specialized financial products related to the environment, such as financing packages for energy-saving home improvements and for audits to certify farms as organic;Microsoft’s Working Connections partnership with the American Association of Community Colleges (AACC) shares value by working with colleges to enhance education in IT; Nestlé, for example, works directly with small farmers in developing

countries to source the basic commodities, such as milk, coffee, and cocoa, on which much of its global business depends.

Source: Porter, M. & Kramer, M. 2006, Strategy & Society, HBR, December. 77-92

Strategic CSR and Transformation1. Nike has moved beyond compliance to long-term strategy, looking at

design and manufacturing decisions. They can save $700 million/year in wasted material in its shoes. By 2020 it aims for zero waste and toxic materials, also working with Partners DuPont, Dow Chemicals and BASF;

2. B&Q, the home retailer, measures tens of thousands of products against a list of social issues ranging from climate chain to supplier-chain working conditions to identify and take action on CSR risks;

3. GE, through its eco-imagination initiative, has reduced its own cost-base by over $100 million and improved efficiency, while providing solutions for other businesses. It also has lobbied for cap-and-trade carbon regulation to build certainty for the future;

4. Rio Tinto, establishing a mine in the only 10% of pristine environment left in Madagascar, works with government, NGOs and local communities toensure social benefit and environmental sustainability measured against explicit targets;

5. Wal-Mart aims to eliminate all of its landfill waste by 2025 working withsuppliers and being 100% fuelled by renewable energy. In 2008/2009 it reduced waste by 57%

But when it goes wrong …• BP, under John Browne, developed an

explicit code of CSR emphasising sustainable energy, climate change, local development and safety;

• 2005 – An explosion at BP’s Texas City oil refinery;

• James Baker led an independent investigation finding that their was a short-term focus on decentralized management systems and entrepreneurial culture without establishing process safety as a core value across it’s refineries.

• BPs CSR stance had left it vulnerable when things went wrong.

• In January 2007 John Browne announced he would be stepping down 18 months early.

• Deepwater Horizon …

“Our commitment to responsibility has to be expressed not in words, but in the actions of the business, day in and day out, in every piece of activity and every aspect of behaviour”

“Scenarios deal with two worlds, the world of facts and the world of perceptions. They explore for facts but they aim at perceptions inside the heads of decision-makers. Their purpose is to gather and transform information of strategic significance into fresh perceptions. This transformation process is not trivial – more often than not it does not happen. When it works, it is a creative experience that generates a heartfelt ‘Aha!’ from your managers and leads to strategic insights beyond the mind’s previous reach.” (Schwartz, 1991, p. 37).

Source: Schwartz, P. 1991. The Art of the Long-view. P. 37.

What are Scenarios?

Are Stories about how the world could evolve;

Are not forecasts;

Are built by different methods;

Highlight key strategy/organisational issues NOW;

Embrace uncertainty;

Examine the roll out of critical business drivers.

From Forecasting to Scenarios:Timeframes

Importance

Distance into the FutureDistance into the Future

ForecastingSpace

ScenarioScenarioSpaceSpace

HighHigh

LowLow

Deep Deep FuturesFutures

Short-term Medium-term Long-term

ScenarioScenarioPlanningPlanning

ForecastingForecasting

FuturesFuturesApproachApproachAccuracyAccuracy

Y+1Y+1 Y+XY+X

Adapted from: Van der Heijden, K. (1996). Scenarios. Wiley.

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What are the primary forces that drive the unfolding future?

PoliticalEconomicSocial DynamicsTechnology

Ecology & EnvironmentLegal, Ethics, & Values

Some are Pre-Determined (certain) and will play out in any story we tell about the future.Some are Uncertain and need analysis for impact and criticality.

Complexity Analysis

GOVERNANCE

Trend Analysis

Scenarios from the Drivers

Important

UncertainCertain

Forecasting Space(What drivers are

predictable?)

Scenario Space(What drivers are

uncertain?)

1. …2. …3. …

1. …2. …3. …

Scenarios-to-Strategy

Scenario 3Scenario 1Scenario 2

Strategy & Resource Base

Gaps? Gaps? Gaps?

Case: British Petroleum (BP)

Syndicate Group Discussion and Presentation Brief:

On pages 4&5 of the case, it states: “Browne asserted that BP had aresponsibility to take action, and that the company would take specific measures, not only to reduce its greenhouse emissions, but also “to fund scientific research, to take initiatives for joint implementation, to develop alternative fuels for the long term, and to contribute to the public policy debate in search of wider global answers to the problem.”

1. Are these costly initiatives a sustainable corporate strategy in the long run?

2. If you were a manager to approve these commitments, how would you weigh these investment in terms of tangible strategic benefits for the company?

3. Will this strategic CSR allow the company to gain competitive advantage in the long run?

4. What does the Deepwater Horizon spill change?5. Your recommendations?