BUS-G202 Business, Government, and Society Lecture Notes - Topic 9 - Business Analytics

Turn on Top Hat: Join Code 904892 (8:00) or 750941 (9:45) BUS-G202 Business, Government, and Society Professor Phil Powell Topic 9 – Business Analytics  Last class is Tuesday, 12/3 just after the Thanksgiving holiday. Exam...

Turn on Top Hat: Join Code 904892 (8:00) or 750941 (9:45) BUS-G202 Business, Government, and Society Professor Phil Powell Topic 9 – Business Analytics  Last class is Tuesday, 12/3 just after the Thanksgiving holiday. Exam 3 is Thursday, 12/5. Any new AES accommodations for Exam 3 are due Wednesday, 11/20, 5:00pm. Use the grade calculation worksheet to know where you stand. There are no office hours this week. Online Self-Test Quizzes 9 and 10 open Monday, 11/4, 12:01pm. Blackrock case discussion opens Thursday, 10/31, 12:01pm. Sources: https://www.dreamstime.com/illustration/remember.html https://www.dreamstime.com/illustration/dont-forget.html  $ Gross margin is revenue minus variable costs. Increased profit through differentiation is a Profit is gross margin minus fixed costs. goal of strategic sustainability. The firm - invests in stronger competition for buyers who attach value to products and services Gross Margin after that have less negative environmental and Strategic Sustainability social impact. This shifts the demand and marginal revenue curves out. P1 DO MRM P0 Strategic sustainability typically requires Gross the firm to commit to “cleaner” inputs and Margin processes that are more expensive. This MC1 shifts the marginal cost curve up. MC0 MCA How do we make calculations that justify D1 sustainability as a profit maximizing strategy? How do we know if the area of MR0 MR1 D0 the orange bordered box is greater than the Q0 Q Q1 area of the gray shaded box?  We need equations for demand and cost. This is derived through regression analysis. Regression specifies the line that minimizes mean squared error. - Cost C (Vertical Axis) as a funtion of Quantity Q (Horizontal Axis) Quantity Cost Predicted Cost Error Squared Error 432 135,875 118,648 17,227 296,762,239 200,000 180,000 217 368 67,419 141,286 61,692 101,694 5,727 39,592 32,793,587 1,567,531,780 160,000 Predicted Cost = 4,207 + 265 x Quantity d 539 167,450 146,994 20,456 418,462,404 140,000 338 19,145 93,747 -74,602 5,565,400,918 120,000 ↓ ↓ ↑ 455 84,847 124,741 -39,894 1,591,543,645 100,000 said+ 276 109,110 77,322 31,788 1,010,466,950 240 63,319 67,785 -4,466 19,948,509 80,000 ↑ 372 100,503 102,754 -2,251 5,065,089 60,000 346 102,289 95,866 6,423 41,256,219 40,000 20,000 ↑ Mean Squared Error (MSE) = 1,054,923,134 0 Square Root of MSE = 32,480 0 100 200 300 400 500 600 The firm made 10 production runs of our established product and measured total cost. Error is the vertical distance between observed cost at the given quantity and cost predicted by the regression line. Error is negative if the regression line underpredicts observed cost. The lower the square root of MSE, the more accurate a predictor is the regression line.  The firm made 10 production runs of the new product. Cost C (Vertical Axis) as a funtion of Quantity Q (Horizontal Axis) Quantity Cost Predicted Cost Error Squared Error 306 518,243 531,942 -13,699 187,656,871 200,000 231 479,030 506,029 -26,999 728,922,822 180,000 Predicted Cost = 1,216 + 346 x Quantity 276 520,916 521,577 -661 436,264 160,000 198 503,651 494,627 9,024 81,437,018 140,000 323 537,291 537,815 -524 275,052 120,000 234 534,115 507,065 27,050 731,697,114 100,000 249 499,709 512,248 -12,539 157,220,090 80,000 367 565,933 553,018 12,915 166,800,414 60,000 252 537,704 513,284 24,420 596,323,097 40,000 269 500,170 519,158 -18,988 360,541,698 20,000 Mean Squared Error (MSE) = 301,131,044 0 Square Root of MSE = 17,353 0 100 200 300 400 500 600 Cost C (Vertical Axis) as a funtion of Quantity Q (Horizontal Axis) 200,000 Predicted Cost of 150,000 Sustainable Product - 100,000 is - higher at scale and 50,000 more accurate than 0 Predicted Cost of 0 100 200 300 400 500 600 - Established Product  Sales are tested at 10 different prices for each product. Quantity Price Predicted Price Error Squared Error Price P (Vertical Axis) as a function of Quantity Q (Horizontal Axis) 110 578.50 682.19 -104 10,752 1400 245 400.75 366.37 34 1,182 304 188.00 228.34 -40 1,627 1200 295 309.25 249.39 60 3,583 1000 168 570.00 546.50 23 552 349 43.75 123.06 -79 6,291 800 Predicted Price = 940 – 2.34 x Quantity 231 404.25 399.12 5 26 600 186 581.50 504.39 77 5,945 138 616.50 616.69 0 0 400 247 385.25 361.69 24 555 200 Mean Squared Error (MSE) = 3,051 0 Square Root of MSE = 55 0 100 200 300 400 500 600 Quantity Price Predicted Price Error Squared Error Price P (Vertical Axis) as a function of Quantity Q (Horizontal Axis) 348 576.72 468 108 11,723 412 297.68 296 2 3 1400 298 517.72 603 -85 7,301 1200 Predicted Price = 1406 – 2.69 x Quantity 249 648.86 735 -86 7,452 1000 445 250.30 207 43 1,866 473 107.22 132 -24 597 800 237 839.18 768 72 5,136 600 316 471.24 555 -83 6,960 393 325.02 347 -22 492 400 247 817.58 741 77 5,930 200 Mean Squared Error (MSE) = 4,746 0 Square Root of MSE = 69 0 100 200 300 400 500 600 We want to produce the Q* that maximizes profit. Demand determines the price P we charge at this Q. We set the derivative of as a function of Q equal to zero. (Q) = R(Q) – C(Q) ’(Q) = slope of line tangent to (Q) at Q ’(Q)= 0 The slope of the line tangent to (Q) is zero at the maximum point of (Q) which is where the firm seeks to operate. ’(Q) = R’(Q) – C’(Q) = 0 at maximum => R’(Q) = C’(Q) at maximum (Q) By definition: R’(Q) = Marginal Revenue (MR) Q C’(Q) = Marginal Cost (MC) Q*  The derivative of the term Kxz is zKxz-1. Calculate the derivative of all terms in f(x) to get f’(x). (Q) = R(Q) – C(Q) ’(Q) = R’(Q) – C’(Q) = 0 => R’(Q) = C’(Q) => MR = MC at maximum. We regress C against Q to estimate the cost function C(Q) = a + bQ. The derivative of the first term a is (0)a(0-1) = 0. The derivative of the second term bQ is (1)bQ(1-1) = b. C’(Q) = MC = b. We regress P against Q to estimate the demand function P(Q) = m + nQ. Given Q, the firm uses the demand function to determine the price to charge. R(Q) = P(Q) x Q = (m + nQ) x Q = mQ + nQ2. The derivative of the first term mQ is (1)mQ(1-1) = m. The derivative of the second term nQ2 is (2)nQ(2-1) = 2nQ. R’(Q) = MR = m + 2nQ We combine regression results with profit maximization to calculate the economic value added by sustainability. We determined C’(Q) = MC = b and R’(Q) = MR = m + 2nQ on the previous slide. Set R’(Q) = C’(Q) and solve for Q to find the quantity Q* that maximizes profit. m + 2nQ = b => 2nQ = b – m => Q* = (b – m) / 2n. Charge P*= P(Q*) at Q* to maximize profit. P* = P(Q*) = m + nQ* = m + n [(b – m) / 2n] = m + (b – m) / 2 = (b + m) / 2 Profit at a quantity of Q* and price of P* is: (Q*) = R(Q*) – C(Q*) = P*Q* – C(Q*) We used regression to estimate C = a + bQ and P = m + nQ for the established product and the new sustainability-oriented product. This allows us to calculate Q* and P* for each product. The economic value added by sustainability is (Q*) for the new sustainability- oriented product minus (Q*) for the established product.  $ Regression estimated: C = a + bQ P = m + nQ Area equals Revenue = P*Q* C = Total Cost a = Fixed Cost P* = (b + m) /2 Gross b = Marginal Cost Margin bQ = Variable Cost C’(Q) = b Revenue = P*Q* Variable Gross Margin = P*Q* – bQ Cost = Gross Margin – Fixed Cost P(Q) = m + nQ R’(Q) = m + 2nQ Q Q* = (b – m) / 2n  Is strategic sustainability a good choice in our case? For the established good: C = 4,207 + 265 Q and P = 940 – 2.34 Q For the sustainability-oriented good: C = 1,216 + 346 Q and P = 1406 – 2.69 Q Established Sustainability-Oriented Product Product a= 4,207 1,126 b= 265 346 m= 940 1,406 n= -2.34 -2.69 Q* = (b – m) / 2n = 144 197 P* = (b + m) / 2 = 602.50 876.00 Gross Margin = P*Q* – bQ* = 48,600 104,410 Profit = Gross Margin – a = 44,393 103,284 Replacement of the established product with the sustainability-oriented Product increases profit by 103,284 – 44,393 = 58,891.  The fixed cost of strategic sustainability may sometimes exceed the fixed cost of production. Impact projects and marketing can incur additional upfront costs. Suppose launch of the sustainability-oriented product requires immediate expenditure on $100,000 of impact projects and $50,000 in new marketing to drive sales and deliver upon sustainability promises for the next 3 years. Annual profit rises $58,891 per year with the new sustainability- oriented product. This is $176,673 over 3 years which is greater than the $150,000 in new fixed costs. Is strategic sustainability still a good investment?  $1 now is worth more than $1 later. $1 later must be converted into its present value. $1 later is worth what you invest now to achieve it later. Assume the interest rate is i. X invested now is (1 + i)X in 1 year. (1 + i)X invested in 1 year is (1+i)(1+i)X = (1+i)2X in 2 years. (1+i)2X invested in 2 years is (1+i)(1+i)2X = (1+i)3X in 3 years. The future value FV of X now in N years is (1+i)NX. The present value PV of X received in N years is the investment required now to achieve X in N years. PV(X received in N years) = X / (1+i)N  The fixed cost of strategic sustainability may sometimes exceed the fixed cost of production. Impact projects and marketing can incur additional upfront costs. Suppose launch of the sustainability-oriented product requires immediate expenditure on $100,000 of impact projects and $50,000 in new marketing to drive sales and deliver upon sustainability promises for the next 3 years. Annual profit rises $58,891 per year with the new sustainability- oriented product. This is $176,673 over 3 years which is greater than the $150,000 in new fixed costs. Is strategic sustainability still a good investment? Approve an investment if the present value of all future cash inflows is greater than the initial cash outflow. PV must be calculated for each separate time period of cash inflow. Time Period (N) PV Formula Cash Flow (X) PV at i=0.08 PV at i=0.10 Now (Year 0) X - 150,000 - 150,000 -150,000 1 Year from Now X / (1+i) + 58,891 + 54,529 + 53,537 2 Years from Now X / (1+i)2 + 58,891 + 50,490 + 48,670 3 Years from Now X / (1+i)3 + 58,891 + 46,750 + 44,246 Sum + 26,673 + 1,769 - 3,547 Invest in strategic sustainability at an interest rate of 8% but NOT at an interest rate of 10%.  BUS-G202 Business, Government and Society Professor Phil Powell Topic 9 – Stakeholder Engagement  Due to my competing external obligations for the university, today’s class is only 45 minutes long and there is NO CLASS on Thursday, 11/7. A lecture video is provided in lieu of class that day. Topic video for the business analytics session will be posted soon. BlackRock case discussion closes Monday, 11/4, 11:59pm. Online Self-Test Quizzes 9 and 10 open Monday, 11/4, 12:01am. Sources: https://www.dreamstime.com/illustration/remember.html https://www.dreamstime.com/illustration/dont-forget.html  Stakeholders are all parties impacted by the business, including stockholders. A company can engage all stakeholders to formulate a strategy for shared value creation – an intentional choice to generate economic value beyond stockholders. internal external CUSTOMER Community VALUE! REMAINDER Government Your Company VALUE? OF SOCIETY Other Companies Vendors Employees Interest Groups Stockholders  Does stakeholder engagement and an intentional goal of shared value creation create an inappropriate distraction from good business? It is a matter of tradeoffs. It must be about profits. ignore external costs internalize external costs more future regulation e.g., voluntary carbon capture less future regulation do not invest in workers invest in workers lower fixed costs, higher MC e.g., public education and training higher fixed costs, lower MC traditional branding sustainability branding lower MC, lower revenue e.g., marketing “green” products higher MC, higher revenue Stakeholder engagement is the choice by a company to initiate a positive sum game with parties directly or indirectly affiliated or impacted by the business model. A company is either responding to implicit or explicit external pressure, anticipating future pressure and attempting to get ahead of it, or pursuing recognition of a new opportunity yet seen by competitors. Actions seen now are often about profit in the future. Example Stakeholder Engagement Actions: 1. redesigning or launching a new product 2. voluntarily committing to standards set by a third party 3. rebranding the company to embrace a new corporate purpose 4. allocating company resources to achieve a community or social goal 5. collaborating with competitors to overcome an industry challenge  BP’s “Beyond Petroleum” campaign was a corporate strategy designed for stakeholder engagement. BP changed its logo to reflect a change in corporate purpose. BP adopted a sunflower design they called the Helios, the name given to the sun god in ancient Greece. This deliberately signaled a shift to renewable energy and concern about climate change. Sources: https://www.zenbusiness.com/blog/bp-logo/ https://www.bp.com/en/global/corporate/news-and-insights/reimagining-energy/helios-at-20.html  “Beyond Petroleum” included two large acquisitions. BP acquired Arco, making BP acquired Solarex, BP the world’s largest making BP the world’s producer of oil and gas. largest producer of solar. Sources: https://www.bp.com/en/global/corporate/who-we-are/our-brands.html https://wirelessunits.com/bp-solar-bp-50j-50-watt-solar-panel/ https://en.wikipedia.org/wiki/File:ARCO_Logo.png  “Beyond Petroleum” was not for consumers. Oil and gas are commodities which means competitors sell perfect substitutes. Consumers choose oil and gas based upon price and access, very rarely upon brand. BP anticipated that climate change could limit its ability to scale and sell at lower prices. GOVERNMENT EMPLOYEES Collude with policy makers to Attract the brightest scientists build an energy sector that is and engineers. They will not responsive to global warming work for a company destroying and invests in renewables. the planet. ACTIVIST GROUPS INVESTORS Take initiative away from Relieve investors of the guilt of environmental protestors and investing in carbon emissions offer practical strategies for and perhaps attract socially addressing climate change. conscious investors. Sources: https://www.bp.com/en/global/corporate/who-we-are/our-brands.html  BP has advised state governments on renewable energy standards which set a % goal for renewables by a given year. Sources: https://www.dsireinsight.com/blog/2020/9/25/states-expanding-renewable-and-clean-energy-standards  Greenpeace accused BP of greenwashing. ARCO acquisition = $26.5 billion Helios rebranding = $207 million Solarex acquisition = $45 million Is this “Lesser of Two Evils” greenwashing? Successful outcomes of BP stakeholder engagement: 1. Dual acquisition allowed BP to enhance economies of scale and reduce marginal cost of production for both renewable and non-renewable energy. 2. Shared value with socially responsible investors attracted capital that help cover the high fixed costs of research and development. 3. BP continued to recruit the world’s best scientific and engineering talent. 4. Contribution to state-level renewable energy standards guaranteed demand for output by BP Solar. Sources: https://www.flickr.com/photos/christineirvine/4528723485 Turn on Top Hat: Join Code 904892 (8:00) or 750941 (9:45) BUS-G202 Business, Government, and Society Professor Phil Powell Case Debrief 10 – BlackRock: Linking Purpose to Profit  We keep the nation in our thoughts and prayers today!  Business Analytics Topdue to illness. There is NO CLASS this Thursday, 11/7. A lecture video is provided in lieu of class. Online Self-Test Quizzes 9 and 10 close TODAY, 11/5, 11:59pm. Nike case discussion opens Thursday, 11/7, 12:01am. Exam is Thursday, 12/5. The deadline for new AES accommodations is Wednesday, 11/20, 5:00pm. Sources: https://www.dreamstime.com/illustration/remember.html https://www.dreamstime.com/illustration/dont-forget.html  Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. Profits and purpose are inextricably linked. We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation. … Over the long- term, environmental, social, and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts. - BlackRock CEO Larry Fink Sources: https://www.blackrock.com/corporate/about-us/leadership/larry-fink https://www.blackrock.com/us/individual  ESG issues link to stakeholder risk which links to profit. As an investor, the job of BlackRock was to assess risk. SOCIAL RISK REGULATORY RISK MARKET RISK Activists can sour a Government can impose Consumers can abandon company’s brand. high compliance costs. an unresponsive brand. Stakeholder capitalism means efficient long-term allocation of capital, durable profitability, and business survivability. Sources: https://89initiative.com/green-capitalism-greenwashing-over-sustainability/ https://www.nj.com/news/2012/10/nj_shoppers_stocking_up_for_hu.html https://www.nps.gov/places/us-capitol.htm  Index and activist investors place different pressure on corporate accountability and performance. investment funds are evenly investment funds target spread across companies specific companies no buying and selling of stock is bought and sold individual company stock based upon specific low management fees decisions by management investor interest is in general high transaction costs economic trends biased investor interests Index investors emphasize long term Activist investors manipulate board decision making and value creation. seats, senior management hiring, They allow efficient integration of and operating strategy to force ESG into corporate strategy. achievement of a short-term goal. BlackRock was a large-scale index investor. It had the sway to hold CEOs accountable to ESG. Sources: https://www.wiseradvisor.com/blog/financial-planning/need-to-know-about-investing-in-index-funds/ https://www.carriedin.com/activist-investor/  Linking profits to purpose has rewards and risks. mitigate social and regulatory risks high opportunity costs of investing by internalizing external costs in achievement of social outcomes recruit better employees who nonprofit partners can hijack produce better products and offer corporate strategy by threatening better service the brand elevate customer loyalty and charge incentivizes the company to signal a higher prices stronger commitment to ESG than it attract socially minded investors can deliver (greenwashing) Sources: https://good.business/ https://www.pocketgamer.com/roblox/bad-business-codes/  Greenwashing comes in seven varieties. HIDDEN TRADEOFF NO PROOF VAGUENESS solve one environmental claim environmental broad environmental claims problem by masking another improvement without data that lead to false impressions e.g., McDonalds replaced e.g., Canada Goose claimed e.g., H&M claimed recyclable plastic straws with full replacement of coyote fur “environmentally conscious” unrecyclable paper straws with “reclaimed fur” with no clothing with no clarity of evidence of sufficient sourcing what this scientifically meant Sources: https://www.investopedia.com/terms/g/greenwashing.asp https://greenbusinessbureau.com/green-practices/the-seven-sins-of-greenwashing/  Greenwashing comes in seven varieties. FALSE LABELS LESSER OF TWO EVILS signal achievement of a highlight achievements that standard that is not verified have little ecological value e.g., Tyson claimed “all e.g., Burger King advertised natural” chicken without “reduced methane beef” even validation by a third party that though the environmental set the labelling standards improvement was negligible IRRELEVANCE FIBBING hype achievements not linked claim environmental results to core environmental issues that are blatantly false e.g., Bank of America bragged e.g., Volkswagen rigged its about certified green office cars to temporarily emit less buildings when it was the top pollutants during vehicle financier of fossil fuel projects emission performance testing Source: https://greenbusinessbureau.com/green-practices/the-seven-sins-of-greenwashing/  Successful ESG investing requires generally accepted reporting standards for sustainability activities. GAAP provides believable financial statements for investors. Financial statements can be audited and validated by third parties. Greenwashing is possible because there is no equivalent for sustainability. Effective ESG disclosure standards must meet the following requirements: 1. Materiality: metrics track substantive variation in social impact 2. Relevance: metrics enable consistent economic decision making 3. Reliability: accuracy of metrics can be independently verified 4. Comparability: metrics are comparable across companies 5. Consistency: metrics are comparable over time in the same company  How far should BlackRock go in demanding standardized ESG disclosure standards? Clients want BlackRock Pushing disclosure to validate delivery upon standards siphons resources promises of ESG. away from core business. Index investing returns will VS. Forcing standardization increase as firms make across firms in an industry longer-term decisions. raises anti-trust concerns. Blackrock cannot greenwash. Blackrock is not a regulator. Advancements in ESG disclosure and higher BlackRock faces public relations backlash participation in reporting have not reversed for “woke capitalism” that has generated the climb in carbon emissions. withdrawals by institutional investors. Note: The KPMG N100 refers to a sample of 4900 countries – the largest 100 companies in each of 49 countries. https://www.mediamatters.org/foxdominion-lawsuit/foxs-anti-woke-campaign-has-network-attacking-its-own-shareholders Source: Professor Steven Kreft and Professor Ellie Mafi-Kreft at the Kelley School of Business https://twitter.com/ConceptualJames/status/1764432588611985747/photo/1  BUS-G202 Business, Government and Society Professor Phil Powell Topic 11 – Asymmetric Information  Asymmetric information is knowledge possessed by the seller but not the buyer or vice versa. Mistaken impressions of value of a product lead consumers to buy too much or too little. Mistaken impressions of cost lead companies to produce too much or too little. Underinformed consumers have an inaccurate willingness to pay and generate an mispositioned demand schedule. Underinformed producers have inaccurate estimates of marginal cost and generate a mispositioned supply schedule. Regulation (government or private) closes gaps in information and ensures socially efficient output. Sources: https://www.vox.com/2014/5/30/5764506/will-obamas-climate-rhttps://www.freepik.com/free-photos-vectors/telling-a-secretules-revive-cap-and-trade https://www.investopedia.com/terms/a/asymmetricinformation.asp Consumers pay too much when they do not have full information about product drawbacks. $ The market price clears at a higher price than Q* Supply (MC) it should because consumers over-value the product in the presence of incomplete information. This generates socially inefficient overproduction of Q0 – Q1 and a loss in SW equal to the area of the shaded triangle. CS P0 Market Clearing Price PS P1 Uninformed Demand (MWTP with incomplete information) e.g., consumers do not know about possible product defects True Demand (MWTP with full information = MB) Q Q1 Q0  Producers generate too much output when they have incomplete knowledge of all production costs. $ True Supply (MC with complete information) Q* e.g., workers do not know about possible on-the-job injuries Uninformed Supply (MC with incomplete information) The market price clears at a lower price than it should because producers under-cost P1 production in the presence of incomplete CS information. This generates socially inefficient P0 Market Clearing Price PS overproduction of Q0 – Q1 and a loss in SW equal to the area of the shaded triangle. Demand (MWTP) Q0 Q Q1 Regulation closes the asymmetric information gap, but 100% closure is rarely socially efficient. $ Marginal Benefit of Regulation R measures regulation that closes the asymmetric information gap. In theory, maximum regulation closes 100% of the gap, which means value perceived by buyers or costs perceived by producers match reality with full certainty. In practice, R measures effort to reduce unknown detractors of value or generators of cost. R is often expressed as a standard that producers must meet, such as defect rates for technology, concentration rates for substances, or disclosure detail for information. Socially efficient regulation R* occurs where the marginal benefit of a stronger standard just equals its marginal cost. Marginal Cost of Regulation R R* 100%  The economic value of increasing certainty from 5% to 10% is much higher than from 95% to 100%. $ Marginal Benefit The marginal benefit of stronger regulation initially rises of Regulation but then falls as the marginal value of more information begins to diminish. The marginal cost rises as more resources are required at the margin to achieve a standard that is incrementally stricter. The marginal cost of complete removal of risk or uncertainty for a good or service is often prohibitively high. R1 > R* is overregulation. The social benefit of an incrementally stronger standard than R* is not worth the social cost. The reduction in SW of R1 equals the value of the black triangle. R0 < R* is underregulation. Markets for Marginal Cost private regulation can profitably close the gap between R0 of Regulation and R* and generate economic net benefit equal to the value of the blue triangle. R R0 R* R1 100%  Intermediaries make money by providing information when government underregulates. credit scores of potential borrowers for lenders performance ratings for durable household goods accident reports for used car buyers quality certification for consumer products brand designation for high quality hotels sustainability certification for food Turn on Top Hat: Join Code 904892 (8:00) or 750941 (9:45) BUS-G202 Business, Government, and Society Professor Phil Powell Topic 12 – Social Regulation  Please complete the online course evaluation at this link: https://coursequestionnaire.iu.edu/! School leadership and I read your comments. It’s how we stay a Top 10 program. Exam 3 is Thursday, 12/5. The deadline for any new AES accommodations is Wednesday, 11/20, 5:00pm. Facebook case discussion closes Monday, 4/1, 11:59pm. Extra Credit Quiz 11 opens Monday, 4/1, 12:01am. Sources: https://www.dreamstime.com/illustration/remember.html https://www.dreamstime.com/illustration/dont-forget.html  A story about vs Sources: https://www.pinterest.com/pin/317644579945533950/ https://1000logos.net/apple-logo/  NGOs invest in social regulation when they perceive a shortfall in government regulation. They initiate social and political pressure against target companies. Consumer boycotts Divestment campaigns constrain Strikes by workers halt reduce product demand. available financial capital. production and revenue. Sources: https://www.csmonitor.com/Business/2012/0607/Have-consumer-boycotts-gone-too-far https://calmatters.org/education/higher-education/2022/12/uc-strike-civil-disobedience/ https://grist.org/climate-energy/the-divestment-movement-is-gaining-steam-what-can-it-achieve/  Social regulation by NGOs has become more relevant to achievement of social efficiency. Government bureaucracies are bigger and slower. Lobbying costs to achieve change have increased. Business has become more international. Changing corporate behavior requires transnational coordination. Public trust in business Improving technology has declined. makes direct communication with millions of people easier and easier. Sources: https://www.vecteezy.com/vector-art/9750164-online-video-conference-concept-internet-communication-people-communicate-using-phone-and-laptop-vector https://www.gisreportsonline.com/r/health-crises-fight/ https://www.marketingcharts.com/industries-230307 https://fortune.com/2015/02/19/wmac-globalization2-0/  Initial recognition of a social issue to regulation of it evolves through four predictable phases. Phase 1: Development Activists express concern. There is no public support. Ability to influence Phase 2: Politicization the issue is highest Public awareness grows. Politicians engage the concern. Phase 3: Legislation Social regulation motivates New statutes address concern if majority support achieved. direct negotiation between NGO and business. Positive Phase 4: Implementation social change can occur Regulators enforce new rules which can be challenged in court. more quickly than relying on the political process. In the end, the targeted company makes the choice of how much to comply with social regulation. 0% 100% compliance The firms profit maximizing choice between compliance 0% and 100% occurs where the expected net benefit of compliance is maximized. A stronger perceived threat to profit from social lobbying by the NGO raises the benefit of compliance. More reasonable and flexible demands by the NGO lower the perceived costs of compliance.  A certain company profile suggests higher returns on a campaign of social targeting. well-recognized brand industry leadership consumer-oriented products (B2C) low switching costs for buyers “biggest sinner” in industry Does Apple past corporate interest in NGO’s issue fit the bill? Intentionally reducing the NGO’s returns on a campaign can be a goal of stakeholder engagement. Sources: https://www.csmonitor.com/Business/2012/0607/Have-consumer-boycotts-gone-too-far https://calmatters.org/education/higher-education/2022/12/uc-strike-civil-disobedience/ https://grist.org/climate-energy/the-divestment-movement-is-gaining-steam-what-can-it-achieve/  Greenpeace’s “Green My Apple” campaign pressured Apple to manage electronic waste. Greenpeace ranked Apple as the worst company for electronic waste and educated consumers with this video about negative global impact. Apple had just launched its iLife Brand campaign with ingenious Mac vs. PC commercials. Greenpeace attacked the iLife brand with its own parody commercial. Sources: https://www.postkiwi.com/2006/green-my-apple/ https://www.greenpeace.org/usa/biting-down-on-green-apples/ https://media.greenpeace.org/archive/Green-My-Apple-Silicon-Valley-Tour-27MZIFIPXWPO.html  The iLife brand campaign amplified Greenpeace’s ability to challenge Apple on electronic waste. “None of this fits with Apple’s iLife image, and none of this is making Apple a successful company. So why hasn’t Steve improved Apple’s design?” Apple had a smaller market share but was the industry’s leading brand. Apple’s progressive image made it an easier target. If Apple decides to respond with a waste management strategy, then other companies will follow. Sources: Prof. Steve Kreft and Prof. Ellie Mafi-Kreft  Greenpeace enjoyed very high returns on its investment in targeting electronic waste. Step 1: Announce a take-back scheme Step 2: Announce a Mac free of bad chemicals. Step 3: Implement Step 1 and Step 2. Step-by-step guidance informs the company, helps it overcome barriers to change, and accelerates implementation. A roadmap establishes a transparent process that can be audited. Discrete achievements can be publicly noted. Companies have a chance to convert negative press into positive press. A payoff is earned for prescribed change. Sources: Prof. Steve Kreft and Prof. Ellie Mafi-kreft  Greenpeace initiated a stakeholder engagement strategy, but they were Apple’s stakeholders. Consumers and students were encouraged to directly engage CEO Steve Jobs. Education was Apple’s biggest market for Macs. Sources: Prof. Steve Kreft and Prof. Ellie Mafi-kreft  Apple announced new Macs that were recyclable, energy efficient, and free of harmful toxins. Apple yielded to all of Greenpeace’s demands. As this commercial shows, Apple integrated “being green” into its brand. Sources: Prof. Steve Kreft and Prof. Ellie Mafi-Kreft  Greenpeace praised Apple and targeted Lenovo, HP, and Dell. They graded all companies in 2017. Sources: https://www.computerworld.com/article/2601821/greenpeace-says-everyone-should-copy-apple.html https://macdailynews.com/2017/10/18/greenpeace-gives-apple-a-b-grade-in-its-guide-to-greener-electronics/  Sophistication of engagement made Greenpeace’s electronic waste campaign very successful. Greenpeace targeted the industry leader. This reduces the lobbying cost of later targeting other companies in the industry. Greenpeace strategically chose stakeholders profitably important to Apple who would respond and pressure the company. Greenpeace provided a solution roadmap making clear how Apple could recover from bad press. Greenpeace signaled negotiable terms for compliance. This made it a positive sum game that Apple embraced. Praise and high grades from Greenpeace provided incentives for companies to comply. Compliance with Greenpeace’s social regulation became an asset for company brands. Sources: https://time.com/4567397/recycling-electronic-e-waste-us-hong-kong-ban/ https://www.greenpeace.org/usa/reports/greener-electronics-2017/ https://grist.org/accountability/380-million-tons-of-plastic-are-made-every-year-none-of-it-is-truly-recyclable/ https://www.yumpu.com/en/document/view/4878072/poisoning-the-poor-electronic-waste-in-ghana-greenpeace  In the end, Apple responded to incentives and incorporated “Green Apple” into its brand. 0% 100% compliance By co-opting the iLife branding message, compliance Greenpeace asserted sufficiently perceived leverage over Apple’s profit. High initial costs of a greener product redesign were later compensated by cost savings from more sustainable operations. Expected benefit of protected profit > Expected cost of compliance  BUS-G202 Business, Government and Society Professor Phil Powell Case Debrief 12 – Greenpeace’s Unfriend Coal Campaign and Facebook  Complete course evaluation at https://coursequestionnaire.iu.edu/. Exam 3 is Thursday, 12/5. No AES adjustments are possible after Wednesday, 11/20, 5:00pm. Online Self-Test Quiz 12 closes TODAY, 11/19, 11:59pm. Starbucks discussion – our final case discussion – opens this Thursday, 11/21, 12:01am. Sources: https://www.dreamstime.com/illustration/remember.html https://www.dreamstime.com/illustration/dont-forget.html  $ Marginal Benefit of Voluntary Compliance Unilever: self-initiated private regulation Levi Strauss: adopted private regulation after social regulator invitation Suncor: rejected private regulation and waited for government regulator Nike: adopted limited private regulation after unsuccessfully fighting social regulator Marginal Cost Apple: complied with social regulator of Voluntary Compliance R 100% 0% 100% compliance compliance Optimal Response to Social Regulator  Greenpeace targets Facebook to motivate big tech to power data centers with renewable energy. well-recognized brand industry leadership (high market share) consumer-oriented products (B2C) low switching costs for buyers “biggest sinner” in industry Does Facebook past corporate interest in NGO’s issue fit the bill? February 2010 announcement of new data facility in Prineville, Oregon sparked the protest. Sources: https://www.freepik.com/free-photos-vectors/facebook-logo  Prineville was specifically chosen as a location because it enabled energy efficiency. Growth required a centralized Facebook facility to replace leasing of space in various locations. Prineville was chosen because of a suitable climate for environmental cooling, renewable power resources, available land, talented regional workforce, and supportive business environment. The facility cost $188 million, was 147,000 square feet, and would employ 35 full time staff plus part-time and contract positions. An airside economizer used outside air to cool the IT systems. The facility only consumed 15% of IT power used. Unemployment was 20% in Prineville. Sources: https://www.datacenterknowledge.com/archives/2010/08/10/google-facebook-a-tale-of-two-data-centers#close-modal https://www.datacenterdynamics.com/en/news/facebook-announces-10th-and-11th-data-centers-prineville-campus-oregon-amid-renewable-energy-fight/  Energy use by data centers presented a real challenge for greenhouse gas emissions. If all data centers in the world were a considered a country in terms of total energy use, it would be fifth behind the United States, China, Russia, and Japan. Facebook’s energy consumption by 2020 would be larger than the 2010 consumption of France, Germany, Canada, and Brazil combined. The power provider for the Prineville plant would be PacifiCorp which sourced 60% of its energy from burning greenhouse gas intensive coal. Yahoo built their data center in Buffalo specifically to be close to renewable energy from hydroelectric sources. Greenpeace used Facebook to change industry practice. Sources: https://granulate.io/blog/data_center_optimization_to_reduce_carbon_emissions/ https://www.wbfo.org/business-economy/2019-09-19/lockports-verizon-data-center-continues-to-grow  Greenpeace launched the “Unfriend Coal” campaign on Facebook’s own platform. Greenpeace’s launched a Facebook group that educated followers about how the Prineville center was powered by coal. A community of 500,000 followers was formed. Greenpeace pushed four demands: 1. Use clean energy to make Facebook coal free. 2. Develop a plan to be coal free by 2021. 3. Educate users about Facebook’s carbon footprint. 4. Publicly advocate for clean energy. Greenpeace Executive Director Kumi Naidoo posted a public letter on Facebook to Mark Zuckerberg criticizing expansion of the Prineville facility and asking him to engage Greenpeace in dialogue. Source: http://www.greenfuture.sg/2011/02/04/how-singaporeans-can-encourage-facebook-to-unfriend-coal-by-earth-day/  Facebook pushed back against Greenpeace and indirectly accused it of greenwashing. Companies have no control over where electricity delivered over the grid is sourced. Barry Schnitt Prineville was chosen because its location allowed an Facebook’s Director of Policy Communications energy efficient facility. The fuel base of power provider for Greenpeace’s data center in Northern Virginia was 46% coal. Giving into Greenpeace would leave Facebook vulnerable to campaigns by other activist groups. Advocacy for a single issue threatens perception of Facebook as a politically neutral platform for social interaction. This would threaten the Facebook brand. 500,000 “Unfriend Coal” followers represented only 0.1% of Facebook. The other 99.9% were uninvolved. Source: https://twitter.com/BarrySchnitt https://www.wired.com/2011/12/facebook-data-center/ “The So Coal Network” was Greenpeace’s response. How much would Facebook give into the demands? As phrased, Greenpeace’s demands had implicit flexibility. GIVE INTO GREENPEACE – PROS GIVE INTO GREENPEACE – CONS “Coal free” had no hard deadline. Any Facebook risks being accused of plan that set 2021 goals could be greenwashing if it promises goals and adjusted as conditions changed. timelines and does not deliver Facebook was an information provider. Releasing detailed carbon footprint Sharing carbon footprint data was data before publishing a plan can consistent with its core competency. strengthen the ability of activists to Facebook could easily raise awareness impose stronger demands. of the virtues of renewable energy Promoting one social issue increases without being too political. activist demands to push other issues. Source: https://www.youtube.com/watch?v=QPty-ZLbJt0  By 2020, surrendering to Greenpeace’s demands was good business and less controversial. Facebook Sustainability: Facebook would operate with net zero greenhouse gas emissions and be 100% powered by renewable energy sourced through purchase power arrangements (PPAs) with power providers that build solar and wind farms. Any remaining emissions would be managed by purchase of carbon onsets sold on voluntary markets. The marginal cost of solar and wind power is zero once power generation infrastructure is funded and build. This reduces long run business expenses. Facebook launched the Climate Science Center to connect users with factual resources from leading climate experts. Source: https://issuu.com/essiezeng/docs/pro1_final_yixin_essie_zeng In the end, Facebook came close to full compliance with social regulation imposed by Greenpeace. 0% 100% compliance Except for an initially negative reply, compliance Facebook invested in near full compliance because Greenpeace’s messaging was a perceived threat to profit and Greenpeace’s demand were reasonable. Expected benefit of protected profit > Expected cost of compliance  BUS-G202 Business, Government and Society Professor Phil Powell Topic 12 – Social Innovation  Complete course evaluation at https://coursequestionnaire.iu.edu/. Exam 3 is Thursday, 12/5. No AES adjustments are possible. During Thanksgiving Break, check View’em to confirm personalized arrangements for Exam 3 and exam makeups. Exam 3 study guide will become available in the “Exam 3 Preparation” folder during Thanksgiving Break. Starbucks discussion – our final case discussion – closes Monday, 12/2, 11:59pm. Up to 2 additional contributions are allowed. Sources: https://www.dreamstime.com/illustration/remember.html https://www.dreamstime.com/illustration/dont-forget.html  Entrepreneurial ventures are launched to introduce new products and redefine markets. New discoveries that add social value earn economic profit. They attract investment and make old solutions obsolete. Home medical technology Portable solar and wind power Micro credit extends small enables cheap and efficient plants bring clean electricity to loans to small groups of access to clinical care. isolated rural communities. women in poor countries. Sources: https://www.thevbpblog.com/healthcare-at-home-blog-series-innovative-health-care-technology/ https://archive.nytimes.com/opinionator.blogs.nytimes.com/2012/08/22/an-attack-on-grameen-bank-and-the-cause-of-women/ https://inhabitat.com/ecos-lifelink-solarwind-water-treatment-wireless-station/  Entrepreneurial ventures must make more profit than traditional choices for investors. Revenue – Expenses = Net Income (Accounting Profit) Economic Profit = Accounting Profit – Profit on Next Best Investment The opportunity cost of investing in the venture is the profit implicitly lost by not investing in the best alternative project. Since its inception in 1957, the average annual rate of return on the S&P 500 has been 12%. This is a default alternative for any investor. Sources: https://www.britannica.com/money/topic/New-York-Stock-Exchange https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#citation-11  Entrepreneurial innovation has reduced the ratio of carbon dioxide to real GDP over time. Government can speed innovation with policies that create a financial incentive to reduce carbon. Carbon taxes place a price on carbon and motivate its reduction. Tradeable permits allow firms to sell and earn income from permits when they implement cleaner technology. Technology standards encourage incremental emission decreases as requirements get tighter over time. Liability provisions stimulate firms to adopt greener processes to reduce their financial risk. Sources: https://www.researchgate.net/figure/US-ENERGY-CONSUMPTION-AND-CO2-EMISSIONS-PER-UNIT-OF-GDP_fig6_3240645  Entrepreneurs innovate outside of organizations. Intrapreneurs innovate inside organizations. Both are visionaries who see opportunity where no one else does. They are inherent risk takers who are inventive and creative. ENTREPRENEURS INTRAPRENEURS freedom to build own business must operate within corporate boundaries raise external capital and recruit advisors access to corporate resources and capital no limit to individual financial returns enjoy salary and job community challenge market incumbents strengthen a market incumbent disruptive innovation institutionalized innovation The profit motive continually incentives individuals to seek solutions to problems that no one else can solve.  Prosperity is driven through creative destruction. Political conflict of interest can halt this cycle. Markets allocate profit to new products and processes that are higher quality and lower cost than old products and processes. Continuous replacement of old with new is creative destruction. Free markets naturally drive creative destruction. Through political lobbying, interest groups can ensure that individual policy makers personally benefit from implementing government regulation that slows creative destruction. Personal interests are pursued at the cost of social efficiency. Sources: Prof. Steve Kreft and Prof. Ellie Mafi-Kreft  There are seven types of conflict of interest. Personal resource scarcity tempts policy makers to forego social efficiency in the decisions they make as they exercise power in pursuit of official duty. SELF DEALING INFLUENCE PEDDLING ACCEPTING BENEFITS using your position to secure using your position to secure receiving bribes or non-monetary personal benefits (e.g. members of benefits for a third party gifts (e.g. the owner of company Congress take government (e.g. secure a government contract you regulate allows you to stay in paid “study trips” abroad) for a campaign donor) their beach house for free) INFORMATION MISUSE PROPERTY MISUSE inappropriately sharing inside using third party assets or information (e.g. share unreleased property for private gain (e.g. host regulatory rules with a company in a campaign event at a government your home state) building at no cost) MOONLIGHTING POST-EMPLOYMENT receiving payment for separate using previous job contacts for the jobs (e.g. a legislator is also a paid benefit of your current job (e.g. as consultant for an industry that is lobbyists, past legislators call in the subject of regulation) favors from current legislators) Government conflict of interest occurs when policy favors a group in a socially inefficient way. Republican Vice President Dick Cheney Democrat Senator Joe Manchin Was CEO of oil company Halliburton Represents West Virginia where a high before serving as Vice President. share of labor force has jobs in coal. self-dealing conflict of interest: owned stock self-dealing conflict of interest: owned stock in Halliburton while serving as VP in coal mining support contractor Enersystems influence peddling conflict of interest: helped accepting benefits conflict of interest: opposed climate Halliburton win government contracts as VP regulations in exchange for Exxon campaign donations post-employment conflict of interest: Halliburton self dealing conflict of interest: influenced regulators to executives enjoyed favored government access approve permits linked to his coal interests Summary Takeaways The profit motive encourages a continuous search by entrepreneurs for new products, processes, and technologies that the free market will value and purchase. The higher the potential economic profit, the faster new discoveries are made. Over time, these discoveries can naturally reduce negative externalities and close gaps between private efficiency and social efficiency. Economic profit is accounting profit minus the profit that can be earned on the next best investment. Economic rate of return is economic profit divided by the total amount of funds invested. Entrepreneurs drive innovation that challenges existing companies, intrapreneurs drive innovation that strengthens existing companies. Creative destruction is a socially efficient process where markets financially incentivize replacement of old products and processes with new products and processes. Policy reflects a government conflict of interest when regulations favor or protect a group in such a way that is socially inefficient and typically impedes market-driven creative destruction. G202 Fall 2023 Powell Exam 3 Review Sheet Exam 3 is Thursday, December 5 during your regularly scheduled class period unless otherwise instructed for purposes of AES accommodation. Come to the exam knowing your seat assignment. Your row letter and seat number are available in View’em in Canvas. The exam is 25 multiple choice questions. You have 40 minutes to complete the exam. For each question, you choose the best response A, B, C, or D and mark it clearly in the right bubble on the scantron sheet. Everyone remains in their seat until 40 minutes have passed and all exam papers have been collected. After all exam papers have been collected, the class session is complete, and everyone is free to leave. Exam questions evenly survey content from lectures and cases that comprise Topics 9, 10, 11, 12, and 13. Make sure you master the following items as you prepare for Exam 3: Topic 9 1. Understand the intuition and mechanics of prediction error, - mean squared error, and estimation using regression analysis of the vertical intercept and slope coefficient of a line given a sample of data for two variables. 2. Given equations for a linear cost function and a linear demand function estimated by regression analysis, calculate the profit- maximizing quantity, price, revenue, cost, and profit. 3. Comprehend intuitively and mathematically how replacement - of an old traditionally designed product (a design to minimize production costs) with a new sustainably designed product (a design to minimize environmental impact) impacts cost and - - demand. 4. Determine whether annual profits earned in the future from strategic sustainability are worth the additional fixed costs 3 incurred now that are required to implement a new strategy of sustainability. Topic 10 1. Differentiate between choices that reflect stakeholder engagement and choices that reflect traditional business decision making. Recognize the economic motivations for stakeholder engagement and how they can impact short-term and long-term profit. 2. Understand, define, and be able to identify all forms of greenwashing. 3. Outline the outcomes of BP’s stakeholder engagement strategy. 4. Contrast index investing with activist investing. Describe the firm behaviors that maximized economic returns for investors in BlackRock funds. 5. Delineate the risks to BlackRock of being too hard or too weak in its push for generally accepted standards for disclosure by companies of ESG activities. Topic 11 1. Understand the impact of asymmetric information on the position of demand and supply schedules when buyers or sellers have full knowledge and when they do not. Compare the price, quantity, consumer surplus, and producer surplus generated by the market when there is asymmetric information to the price, quantity, consumer surplus, and producer surplus generated by the market when both buyers and sellers have full information (which is the socially efficient outcome). Analyze the impact of four asymmetric information scenarios: buyers overestimate the value of the product, buyers underestimate the value of the product, sellers overestimate the marginal cost of production, and sellers underestimate the marginal cost of production. 2. Differentiate the economics between government regulation and private regulation and outline the relationship of each with the socially efficient level of regulation. 3. Identify the changes made and the changes not made by Nike to the labor standards it enforced at contracted factories and describe the outcomes of those changes made and not made. 4. Describe the impact of asymmetric information on the market for shoes and the market for labor in which Nike, Reebok, and their competitors operated. Topic 12 1. Identify the four stages of evolution of a social issue into a regulated business activity and explain why and when it is optimal for activist groups to bypass government regulation and instead invest in social regulation. Outline the conditions when voluntary compliance with a social regulation by a  company is most likely. 2. Comprehend the tactics employed by Greenpeace in the “Green My Apple” campaign and the economic logic behind them. 3. Describe how a social regulator incentivizes a target company to comply with its demands and what happens when the company embraces compliance as part of its brand identity and competitive strategy. Explain what can happen if a company chooses not to comply with a social regulator. 4. Comprehend the tactics employed by Greenpeace in the “Unfriend Coal” campaign and the economic logic behind them. Understand the motivation, tradeoffs, and outcomes of how Facebook analyzed and chose its initial and final response to Greenpeace. Topic 13 1. Calculate accounting profit, economic profit, accounting rate of return, and economic rate of return. 2. Contrast policies that are socially efficient from those that reflect government conflict of interest. Define and differentiate types of conflict of interest given a description of behavior by a politician. 3. Compare and contrast the advantages and disadvantages of entrepreneurship in a startup environment with intrapreneurship in a corporate environment. 4. Explain the advantages and disadvantages of different possible responses of Starbucks to Global Exchange. Comprehend the economic logic of the response by Starbucks to Global Exchange and outline the market consequences of the choices made by Starbucks. Turn on Top Hat: Join Code 904892 (8:00) or 750941 (9:45) BUS-G202 Business, Government, and Society Professor Phil Powell Case Debrief 12 – Collaborating with Activists: How Starbucks Works with NGOs  Exam 3 is this Thursday, 12/5 – a week from today. Check View’em to confirm your arrangements. No AES adjustments are possible. Exam Makeups are Tuesday, 12/10 and Thursday, 12/12. Come to class only if you have an exam makeup confirmed in View’em. Office hours are Wednesday, 12/4 at 8:15pm. Video of the office hours session is posted immediately after it closes. Remaining grades will be posted soon after Thursday, 12/12. Please be patient and avoid any individualized final course grade requests. Sources: https://www.dreamstime.com/illustration/remember.html https://www.dreamstime.com/illustration/dont-forget.html  Can a company that is so visibly committed to social responsibility earn economic profit? Starbucks brand = “People First, Profits Last” Benefits: differentiated brand (charge higher price) sell an experience (not just coffee) attract socially minded investors low employee turnover (higher productivity) Drawbacks: higher fixed and marginal costs slow returns on some investments more vulnerable to activist attacks not perceived to be politically neutral Sources: https://rulanq.wordpress.com/2012/11/10/95/ https://www.forbes.com/sites/stephanieburns/2021/03/04/corporate-social-responsibility-is-more-important-than-everheres-how-to-ensure-your-company-is-stepping-up/?sh=3096d9ad1c10  Fair Trade Coffee had five principles that imposed high standards on businesses that sold it. asked starbucks if they'd switch Global exchange Fair Price: Grower cooperatives receive a fair price of no less than $1.26 (Starbucks already paid $1.20). /lb Democratic Organization: Cooperatives are transparent and democratically governed by growers. Long Term Direct Trade: Importers deal directly with cooperatives and agree to long-term stable contracts. Access to Credit: As requested, importers provide growers harvest financing or forward cash payment. then give Capital working Environmental Sustainability: Growers use integrated crop management to ecologically protect the land. Sources: https://www.fairtradecertified.org/blog/fair-trade-month-coffee-guide/ https://www.coffeeam.com/pages/fair-trade-in-depth Starbucks scored high on every dimension in being an attractive corporate target for NGOs. well-recognized brand => store on every corner industry leadership => dominant national coffee shop brand consumer-oriented products => accessible everywhere low switching costs => easy to buy coffee elsewhere “biggest sinner” in industry => biggest U.S. coffee buyer past corporate interest in NGO’s issue => progressive brand Starbucks was a “love to hate” brand for coffee drinkers, employees, investors, and activists. The company’s virtue signaling made it politically vulnerable.  The tradeoffs to carrying Fair Trade coffee in response to Global Exchange were significant. RISKS BENEFITS Lose consumers because of higher Stop pressure and negative press for price or lower quality. (higher cost ( consumers from Global Exchange. Lose current trusted suppliers. Be a first mover in Fair Trade market. Fair trade suppliers are immature. Increase enthusiasm of employees Look weak as an NGO target. and socially minded investors. Global Exchange exercised effective leverage over Starbuck’s profit by using its main product to hold the company accountable to its brand of social responsibility.  VS. OPTION 1: IGNORE GLOBAL EXCHANGE OPTION 2: FIGHT GLOBAL EXCHANGE There is confidence that the brand