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STR@TEGY NEWSLETTER
STR@TEGY features articles of interest to sales and marketing management and your contributed article is welcome - preferably around 1,200 to 1,700 words.
Contact (03) 9848 5515 or SCROLL TO BOTTOM for details.
***CONTENTS***
1
PROCTOR & GAMBLE'S INNOVATION CULTURE
How we built a world-class organic growth engine by investing in people
by A.G. Lafley, with an introduction by Ram Charan
2
A CLEAR LOOK AT BIOFUELS
Myths abound regarding the pros and cons of biofuels. Here is a scorecard to separate truth from fiction.
3
MY UNFASHIONABLE LEGACY
Participative management has proven its remarkable
capabilities again and again. So why is it passing
into obscurity?
by Ralph Sink, courtesy strategy+business magazine
(USA)
4
THE END OF CHEAP FOOD
Rising incomes in Asia and ethanol subsidies in
America, in an international context, have ended a
long period of falling food prices.
5
FMCG : WILL ORGANIC FOOD REALLY SAVE THE
EARTH?
If you think you can make this planet better by
clever shopping, think again. You might just make
it worse.
courtesy The Economist
6
THE ENERGY-EFFICIENT "GREEN" SUPPLY CHAIN
How to reduce energy consumption and carbon output
in procurement, production, and distribution.
Courtesy of strategy+business by Peter Parry,
Joseph Martha, and Georgina Grenon
7
PARTNERS AT THE POINT OF SALE
With “shelf-centered collaboration,” manufacturers
and retailers can finally put the right product on
the right shelf at the right time for the right
consumer.
article by Rich Kauffeld, Johan Sauer, and Sara
Bergson; published courtesy of strategy+business
magazine (USA)
8
MEASURING MARKETING: BEYOND ROI
Too many marketers are adopting too narrow a definition of accountability
courtesy Fast Company magazine (SMI's favourite business magazine...)
ARTICLE CONTENT
1
PROCTOR & GAMBLE'S INNOVATION CULTURE
How we built a world-class organic growth engine by investing in people
by A.G. Lafley, with an introduction by Ram Charan
INTRODUCTION
The heart of a company’s business model should be game-changing innovation. This is not just the invention of new products and services, but the ability to systematically convert ideas into new offerings that alter the very context of the business.
As they lead to repeat purchases, these offerings reshape the market, so that the company is playing an entirely new (and profitable) game to which others must adapt. A number of game-changing innovators are operating today, including such household-name enterprises as Procter & Gamble, Nokia, the Lego Group, Apple, Hewlett-Packard, Honeywell, DuPont, and General Electric. Wherever you see a steady flow of noteworthy innovations from one company, you can probably assume that it is a game-changing innovator, with the distinctive kinds of social connections, culture, and supporting behaviors that enable it to play that role.
Consider the case of Procter & Gamble Company. Since A.G. Lafley became chief executive officer in 2000, the leaders of P&G have worked hard to make innovation part of the daily routine and to establish an innovation culture. Lafley and his team preserved the essential part of P&G’s research and development capability — world-class technologists who are masters of the core technologies critical to the household and personal-care businesses — while also bringing more P&G employees outside R&D into the innovation game. They sought to create an enterprise-wide social system that would harness the skills and insights of people throughout the company and give them one common focus: the consumer. Without that kind of culture of innovation, a strategy of sustainable organic growth is far more difficult to achieve.
A.G. Lafley and I coauthored The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation (Crown Business, 2008) to explain how to make game-changing innovation drive growth on a consistent, well-paced basis. The critical factors that we cover in the book include keeping a laser-sharp focus on the customer; establishing a disciplined, repeatable, and scalable innovation process; creating organizational and funding mechanisms that support innovation; and demonstrating the kind of leadership necessary for profitable top-line growth as well as cost reduction.
One aspect of building an innovation culture deserves more attention than we could give it in The Game-Changer: designing a social system that would spark new ideas and enable critical decisions. In the article that follows, A.G. explains the human factors that fostered innovation at Procter & Gamble. It could be thought of as the “missing chapter” to The Game-Changer; a vital component that isn’t always obvious, even to experts, precisely because it is so fundamental.
— Ram Charan
A G LAFLEY
...one hell of a CEO, says Sales Marketing Institute, Australia)
When I became CEO of Procter & Gamble in 2000, we were introducing new brands and products with a commercial success rate of 15 to 20 percent. In other words, for every six new product introductions, one would return our investment. This had been the prevailing ratio in our industry, consumer packaged goods, for a long time.
Today, our company’s success rate runs between 50 and 60 percent. About half of our new products succeed. That’s as high as we want the success rate to be. If we try to make it any higher, we’ll be tempted to err on the side of caution, playing it safe by focusing on innovations with little game-changing potential.
The decision to focus on innovation as a core strength throughout the company has had a direct influence on our performance. P&G has delivered, on average, 6 percent organic sales growth since the beginning of the decade, virtually all of it driven by innovation. Over the same period, we’ve reduced R&D spending as a percentage of sales; it was about 4.5 percent in the late 1990s and only 2.8 percent in 2007. In that year, we spent US$2.1 billion on innovation, and received $76.5 billion in revenues. We’re getting more value from every dollar we invest in innovation today.
The focus on innovation has also had a direct effect on our portfolio of businesses. The Game-Changer describes how we sold off most of P&G’s food and beverage businesses so we could concentrate on products that were driven by the kinds of innovation we knew best. As it turns out, with this narrower mix of businesses, we can more easily devote the resources and attention needed to build a broad-scale innovation culture.
We also focused on creating a practice of open innovation: taking advantage of the skills and interests of people throughout the company and looking for partnerships outside P&G. This was important to us for several reasons.
First, we needed to broaden our capabilities. Each of our businesses was already practicing some form of innovation improvement, but they were not all improving at the same rate. As the CEO, I could lead and inspire the company as a whole, but I could not substitute my judgment for that of other leaders who knew and understood their specific businesses far better than I could. The decision makers in each business would have to examine their competitive landscape and their own capabilities to figure out what kinds of innovation would work best and win with consumers.
Second, building an open innovation culture was critical for realizing the essential growth opportunity presented by emerging markets. During the next 10 years, between 1 billion and 2 billion people in Asia, Latin America, Eastern Europe, and the Middle East will move from rural, subsistence living to relatively urban and increasingly affluent lives. They will have more choices, a greater connection with the global economy, and the ability to realize more aspirations. Along the way, they will become, for the first time, regular consumers of branded products in categories such as personal care, fabric care, and prepared food.
It would seem relatively simple to execute a strategy for reaching these new consumers. But the days of achieving automatic growth by entering new markets are essentially over. Just as retailers often reach a level of saturation — where it doesn’t make sense to open any more stores in a particular market — many mature consumer products companies are rapidly running out of the so-called white space in new regions. P&G, for example, already has a market presence in more than 160 countries, with large operations on the ground in more than 80 of them. We can grow our business in these countries only by consistently developing new products, processes, and forms of community presence. And to do that, we need to involve people, inside the company and out, who are comfortable and familiar with the values and needs of consumers in these parts of the world.
A third reason for focusing on open innovation had to do with fostering teams. The kinds of innovation needed at Procter & Gamble must be realized through teams. The idea for a new product may spring from the mind of an individual, but only a collective effort can carry that idea through prototyping and launch. If innovation is to be integrated with both business strategy and work processes, as we believe it should be, it requires a broad network of social interactions.
Moreover, our experience suggests that many of the failures of innovation are social failures. Promising ideas, with real potential business value, often get left behind during the development process. Some innovations are timed too early for their market; others are lost in execution. Often, the root cause is poor social interaction; the right people simply don’t engage in productive dialogue frequently enough.
For all these reasons, we consciously set in place a series of measures for building an open innovation culture at P&G.
“The Consumer Is Boss”
Procter & Gamble is known for its highly capable and motivated workforce. But in the early 2000s, our people were not oriented to any common strategic purpose. We had a corporate mission to meaningfully improve the everyday lives of the customers we served. If 15 seconds with a deodorant or two minutes with a disposable diaper have made a small part of your life a little bit better, then we’ve made a difference.
But we hadn’t explicitly or inspirationally enrolled enough of our 100,000-plus people around the world in our mission; it was neither fully embraced by employees nor fully leveraged by the company’s leadership. Our innovation efforts suffered accordingly.
So we expanded our mission to include the idea that “the consumer is boss.” In other words, the people who buy and use P&G products are valued not just for their money, but as a rich source of information and direction. If we can develop better ways of learning from them — by listening to them, observing them in their daily lives, and even living with them — then our mission is more likely to succeed. “The consumer is boss” became far more than a slogan to us. It was a clear, simple, and inclusive cultural priority for both our employees and our external stakeholders, such as suppliers and retail partners.
We also linked the concept directly to innovation. From the ideation stage through the purchase of a product, the consumer should be “the heart of all we do” at P&G. I talked about it that way at dozens of company town hall meetings during my first months as CEO. More and more people began thinking about how to apply the “consumer is boss” concept to their work. Resources were still scarce, and there were fierce debates about which ideas deserved the most attention and where to deploy money and people. But this concept came to matter more than those other concerns. People became more willing to subjugate their egos to the greater good — to improving consumers’ lives.
It’s natural for a mature company to become more insular. So we explicitly tried to build better connections with the people who bought our products. For example, in the early 1990s, we had acquired the Max Factor and Ellen Betrix cosmetic and fragrance lines from Revlon Inc. Innovation in fine fragrances had always been driven by fashion. With slow growth of 2 to 3 percent a year, low margins, and weak cash flow, fine fragrances didn’t seem to be an attractive business for P&G. But we saw a chance to change the game.
We began by clearly and precisely defining the target consumer for each fragrance brand, and identifying subgroups of consumers for some brands. We didn’t walk away from the traditional approaches of the fine fragrance business. We still maintained partnerships with established fashion houses, such as Dolce & Gabbana, Gucci, and Lacoste. But we also made the consumer our boss. We focused on a few big launches and on innovation that was meaningful to consumers, including fresh new scents, distinctive packaging, provocative marketing, and delightful in-store experiences. We also took advantage of our global scale and supply chain to reduce complexity and enable a significantly lower cost structure.
The result? Our team turned a small, underperforming business into a global leader. In 2007, P&G became the largest fine fragrance company in the world, with more than $2.5 billion in sales — a 25-fold increase in 15 years.
Elsewhere in our company, we experimented with new ways to build social connections through digital media and other forms of direct interaction. We designed Web sites to reinforce consumer connections, to better understand consumers’ needs, and to experiment with prototypes. For example, we used to hand-make baby diapers for a product test. Now, we show people digitally created alternatives in an onscreen virtual world. If the consumers we’re talking to have an idea, we can redesign it immediately and ask them, “Do you like that better? How would you use it?” It allows us to iterate very quickly. In effect, we are building a social system with the purchasers (and potential purchasers) of our products, enabling them to codesign and co-engineer our innovations.
Integrating Innovation
We are constantly innovating how we innovate. We keep refining our product-launch model — from idea to prototype, to development, to qualification, to commercialization. Applying this sequential practice on a large scale, and making it replicable, does not mean eliminating judgment. In fact, there’s still a fair amount of judgment that’s applied along the way. That’s why we need active leaders and a strong innovation culture.
Scalability is critical at a company the size of Procter & Gamble. If we can’t scale our processes, they don’t have much value for us. In fact, scalability is often the justification for our existence as a multinational, diversified company. Our innovation practices are thus designed for deliberate learning, across all our functions, product categories, and geographic locations. Once people understand a particular process, they can replicate it and train others. It soon becomes a part of normal decision making.
P&G had not treated innovation as scalable in the past. We had always invested a great deal in research and development. When I became CEO, we had about 8,000 R&D people and roughly 4,000 engineers, all working on innovation. But we had not integrated these innovation programs with our business strategy, planning, or budgeting process well enough. At least 85 percent of the people in our organization thought they weren’t working on innovation. They were somewhere else: in line management, marketing, operations, sales, or administration. We had to redefine our social system to get everybody into the innovation game.
Today, all P&G employees are expected to understand the role they play in innovation. Even when you’re operating, you’re always innovating — you’re making the cycles shorter, or developing new commercial ideas, or working on new business models. And all innovation is connected to the business strategy.
In fostering this approach and building the social system to support it, the P&G leadership has had to be very disciplined. For instance, we are now set up to see many more new ideas. Our external business development group is very small; all it does is meet with individuals, groups, research labs, and other potential collaborators, including (as we noted in The Game-Changer) P&G’s competitors on occasion. Any of these may propose new technologies, new product prototypes, or new ways to connect us to our consumer base. Last year, the business development group reviewed more than 1,000 external ideas. This year, they’ll see 1,500. We tend to act on about 5 to 7 percent of them.
We are also open to ideas from more regions than in the past. Innovation used to travel primarily from developed markets to developing markets. When new technology appeared in Japan, Germany, or the U.S., it flowed across the regions and down the hierarchy. Today, more than 40 percent of our innovation comes from outside the United States. People in India, China, Latin America, and some African countries have become part of our social system. Their presence has made us more open, and this helps compensate for our natural tendency to become more insular.
We maintain open work systems in a lot of places around the world. Executives’ offices don’t have doors. Leaders don’t have a secretary cordoning them off. All the offices on the executive floor at Procter & Gamble are open; the conference room is an open, round space. We made it round as a small symbol of the new approach. We’re seeing indications that this new social process is catching on all over the world.
The Talent Component
P&G used to recruit for values, brains, accomplishment, and leadership. We still look for these qualities, but we also look for agility and flexibility. We believe the “soft” skills of emotional intelligence — fundamental social skills such as self-awareness, self-fulfillment, and empathy — are needed to complement the traditional IQ skills. (See “Tea and Empathy with Daniel Goleman,” by Lawrence M. Fisher, s+b, Autumn 2008.) Maybe “soft” isn’t the right word: These skills are every bit as hard to master as some tough analytical skills. People just learn them in a different way.
Some people at Procter & Gamble have struggled with this new approach, but most of our best people have done really well with it. Curiosity, collaboration, and connectedness are easy to talk about but difficult to develop in practice. We have tried to carefully identify and ease out people who are controlling or insecure, who don’t want to share, open up, or learn — who are not curious. And in the process, we have discovered that most of our people are naturally collaborative.
We also try to develop people by giving them new stimulation and greater challenges. As they move through their careers, we deliberately increase the complexity of their assignments. That might mean entering a market that’s not developed yet or a market with a competitor already firmly established. Whatever the challenge, it stretches them.
We give our most promising people time in both functional and line positions, because we think our best leaders are great operating leaders and great innovation leaders. We also move people around geographically. We bring people into our Cincinnati headquarters from around the world, and we make a point of moving our headquarters people to our global businesses. Almost all of us have worked outside our home region. Almost all of us have worked in developing or emerging markets. And almost all of us have worked across the businesses. We track that progress very carefully.
We’ve been fortunate that some of this flexible, multifaceted ethic exists in our heritage. For example, Procter & Gamble pioneered a technician-based system in its manufacturing plants during the 1960s and ’70s. In this system, we avoided the approach in which one person was assigned to do only one job. The technician system still operates today: To get the highest evaluation rating in a P&G factory, you learn how to do all the jobs on the line. And, once you have that rating, we expect you to be capable of problem identification, problem solving, and innovation. This background has made it easier for us to plug manufacturing and engineering into the innovation culture.
Once people have succeeded at innovation, you can see the energy in the company changing. People routinely say, “We can do this. This is feasible.” The attitude changes are incredible to watch; once people see the simplicity, durability, and sustainability of an innovative mind-set, it continually reinforces itself.
On average, younger managers and younger employees are more open to fresh, innovative thinking. Since 2000, we’ve lowered the average age of our people by almost 10 years because of our acquisitions and our moves in emerging markets. We have also recently brought in people from outside to enable and stimulate creative thinking. This was unprecedented for a company that has traditionally hired only entry-level people and promoted from within.
Virtually every leading practitioner of our new design capability came from the outside as a mid-career hire. They arrived from BMW, Nike, and some of the best design shops in the world. We probably have 150 to 200 such people and, although it’s not a huge proportion of the P&G staff, it’s big enough to make a difference. They bring us not just the art and science and practice of design, but an integrative way of thinking.
Integrative Thinking
One of our favorite examples of integrative thinking involves Febreze, a very successful odor-control product. One of the active ingredients in Febreze surrounds a malodor and removes it, as opposed to covering it up or masking it. Febreze started out as a fabric refresher. Now it’s also an air freshener in the U.S. and elsewhere.
Not long ago we took the Febreze package, product, and brand name to Japan. We tested it on a small scale with Japanese consumers. They rejected it. As interpreted by the P&G team (a relatively junior-level group), the gut reaction of the Japanese was: “Here’s another Western product that’s not going to work in our country.”
But we persisted. “Were there any Japanese households or consumers who really liked the product?” we asked. The team didn’t know, but they went back and looked at the research. Lo and behold, 20 percent of the first survey group absolutely loved the product.
Personally, I wasn’t surprised. I had spent eight years living and working in Japan and I knew that Japanese people can be hypersensitive to malodors. A man can smoke cigarettes outside or in a subway station, but many Japanese women won’t let their husbands smoke in the house. When the husband comes home, he may have to take his smoky clothes off and wash them before he can sit down.
So we resolved to try again. The P&G team changed the viscosity of the product. They changed the fragrance from high profile to a very low profile scent. They changed the bottle to a much more delicate design that more Japanese people felt comfortable having visible in their homes. They changed the spray pattern to a mist. They changed everything but the core technology of the product, and it became a phenomenal success in Japan.
This is a story we tell ourselves at P&G to drive home the need for integrative thinking. The project started with a consumer-centric concept. It involved people in a variety of functions and at least two regions. It opened our team members’ eyes to other possibilities. And it came to fruition because we were skilled at having the kinds of processes and conversations that would lead people to synthesize their ideas.
Our long-standing middle managers, people who have grown up in the P&G system (as I did), are starting to recognize that better innovation processes can expand their personal and leadership skills. They’ve all been through cost-cutting and productivity exercises. But that’s not the same as creating top-line opportunities that can earn kudos from consumers. Nobody is telling them they have to be the geniuses who invent an idea. They will get credit for turning ideas into replicable processes and learning from their mistakes. In operating cross-functionally, they are also moving away naturally from the old silos.
The result of P&G’s focus on innovation has been reliable, sustainable growth. Since the beginning of the decade, P&G sales have more than doubled, from $39 billion to more than $80 billion; the number of billion-dollar brands, those that generate $1 billion or more in sales each year, has grown from 10 to 24; the number of brands with sales between $500 million and $1 billion has more than quadrupled, from four to 18. This growth is being led by energized managers — innovation leaders — who continually learn new ways to grow revenues, improve margins, and avoid commoditization. Our culture of innovation is helping P&G leaders be more effective, and in the process, they’re renewing our company every day.
Once people have succeeded at a game-changing innovation, the level of energy in the company elevates. Even people who weren’t directly involved are affected through the social networks. It becomes easier for them to expand their idea of what is feasible. Building this sort of capability often has the rhythm of, say, skilled basketball practice: a group of people who gradually learn seamless teamwork, reading one another’s intentions and learning to complement other team members, ultimately creating their own characteristic, effective, and uncopyable style of successful play.
by A G LAFFLEY
(Breakout)
Becoming a Great Innovation Team Leader
by Ram Charan
As you read about Procter & Gamble’s social system and innovation culture, you may be thinking, “There are some good ideas here…for someone else. In my shop, we can barely keep the trains running on time. How am I supposed to do all this?”
Leaders of innovation take their game to another level through a particular set of practices:
Establish clear criteria and don’t hesitate to shift resources. Great innovation leaders keep a sharp eye on their short-term and long-term business goals and think through how and when various innovation projects will contribute to them. They determine which projects to accelerate or cut on the basis of resource consumption as well as market potential. They don’t hesitate to pull the plug on projects that don’t clear the hurdles or that simply consume more time or money than the business can afford.
Concentrate on possibility. The process of innovation is inherently uncertain. Innovation leaders live with ambiguity as ideas are shaped and reimagined; they don’t let ideas die before they’re fully formed or understood. Once a project is selected, these leaders inspire the team to keep going even as they encounter obstacles and go through iterations. At the same time, leaders are vigilant for indications that the project’s market potential has diminished.
Cross boundaries and help others do the same. Innovation becomes riskier when there are gulfs between, for example, technologists, marketing people, and those responsible for commercializing a new product. Inevitably, trade-offs will be required among these groups. Leaders thus must ensure that communication channels are open from the start and that facts and sound judgment prevail. They must be prepared to break deadlocks and resolve conflicts by keeping individuals focused on their common goal: the customer.
Reward effort and learning. Failure is a fact of life for companies that pursue innovation seriously, and a leader’s response to it has a huge effect on company culture and therefore on future projects. Innovation leaders know that failures represent opportunities to learn. They keep people energized by publicly recognizing their earnest efforts and willingness to venture from the tried and true.
#
-by Ram Charan
#
2
A CLEAR LOOK AT BIOFUELS
Myths abound regarding the pros and cons of biofuels.
Here is a scorecard to separate truth from fiction.
by Bill Jackson, Eric Spiegel, and Leslie Moeller
In the flood of media attention that biofuels have received, it is difficult to distinguish the facts from the fanfare. Generally made from corn, sugarcane, soy, and other crops, biofuels for powering automobile engines have been hailed as a panacea that will arrest global climate change, reduce dependence on fossil fuels, ensure energy security, and turbocharge agricultural economies. Yet biofuels have also been denounced by critics who claim they will do more harm than good to the environment and they are not economically sustainable absent government protection. To determine who is right, we spoke to dozens of experts in government, corporate, academic, and nonprofit organizations — people such as Prabhu Pingali, director of the agricultural and development economics division of the Food and Agricultural Organization (FAO) of the United Nations; Miguel Pestana, vice president of global external affairs for Unilever PLC; venture capitalist Vinod Khosla, founder of Khosla Ventures; and Greg Stephanopoulos, Bayer Professor of Chemical Engineering at MIT — and reviewed studies on the growth and viability of the biofuels market. Based on this research, we explored the truth of prevalent assumptions regarding both biofuel’s promise and its impact on markets and the environment.
Perception: Substituting biofuels for petroleum will substantially reduce greenhouse gas (GHG) emissions.
Reality: At least in the short term, biofuels offer minimal GHG benefits.
At first glance, biofuels appear to leave a much smaller carbon footprint than oil because energy crops (like all crops) extract carbon from the atmosphere. Indeed, studies such as the International Energy Agency’s 2004 "Biofuels for Transport" report indicate that “well-to-wheel” GHG savings from biofuels range from 20 percent with corn ethanol to 80 percent or higher with sugarcane ethanol or cellulosic ethanol (produced from grass, plant residues, and woody crops). Corn ethanol generates more GHG emissions than cellulosic ethanol because the corn must be cultivated and distilled, processes that require extensive use of fertilizer, diesel, coal, and natural gas.
However, the well-to-wheel savings fail to take into account the impact of farming land that was, or would otherwise revert to, grassland or forest. Clearing land to convert forest or grassland into energy crops results in a substantial deposit of carbon dioxide into the atmosphere. The magnitude of that deposit depends on the type of property. For example, clear-cutting and burning a forest releases more carbon dioxide than harvesting grass. And two studies recently published in Science found that when this initial carbon dioxide deposit is taken into account, depending on the type of land used for agriculture and the type of crop grown, ethanol's contribution to GHG emissions could break even with that of petroleum in anywhere from a couple of decades to a few centuries.
That said, some emerging biofuel technologies, such as cellulosic and algaeic, require less-active cultivation of land. Consequently, peering further into the future, the environmental hope for biofuels is not a complete chimera.
Perception: Biofuels are not economically viable as a substitute for petroleum.
Reality: Biofuels offer a competitive alternative to petroleum.
Although break-even costs for different biofuel technologies vary significantly, in Brazil sugarcane ethanol is already commercially viable. Introduced there in the 1970s, cane ethanol was nurtured as an infant industry and backed by public subsidies for many years. Brazil’s government financed new ethanol plants, directed the state-owned oil company Petrobras to install ethanol tanks and pumps throughout the country, and mandated that carmakers design and manufacture vehicles that could run on pure ethanol.
About a decade ago, Brazil phased out the subsidies, but with a thriving, efficient cane ethanol industry in place, car manufacturers had to find an inexpensive way to make vehicles that could burn both ethanol and gasoline. Today, 85 percent of autos sold in Brazil feature flex-fuel power trains, and cane ethanol supplies a significant portion of the automotive fuel pool based on its economic merit. Thanks to the large number of flex-fuel vehicles, consumers can opt for whichever fuel is cheaper, which ultimately varies based on the relative prices of crude oil and sugar.
Globally, corn ethanol is still much more expensive than petroleum and will be until oil prices rise another 20 percent or so. Cellulosic ethanol, although still in the early stage of development, will likely break even with petroleum when the former is around US$55 per barrel without government incentives — about half the price of oil now and a little below the International Energy Agency’s 2007 forecasted oil price of $62 a barrel in 2030.
Perhaps the biggest endorsement of biofuels as an economically viable alternative to petroleum has come from the Organization of the Petroleum Exporting Countries (OPEC) itself. Abdalla El-Badri, secretary-general of OPEC, noted in June 2007 that the consortium was considering cutting its investment in new oil production in response to moves by the developed world to create and use more biofuels. “If we are unable to see a security of demand…we may revisit investment in the long term,” El-Badri said.
Perception: Global energy markets are so vast that biofuels cannot hope to alter the balance of petroleum supply and demand.
Reality: If agricultural supply expands at historical rates, biofuels can make a significant contribution to the transportation fuel pool, resulting in an oversupply of petroleum.
It’s important to note that although biofuels are the best and most cost-efficient hope for an alternative to petroleum, biofuel production still represents less than 1 percent of total global fuel demand. However, if agricultural improvements continue apace, biofuels can eventually equal or surpass current OPEC exports without jeopardizing the world’s food supply.
With rare exceptions, for the last half century, advances in plant breeding, soil study and fertilizer use, water management, weed and pest control, and infrastructure development have increased crop yields and agricultural productivity. Farming also produces more food using less labor, capital, chemicals, and land.
New techniques, such as more sophisticated genetic approaches to breeding, may well accelerate the rate of improvement in agricultural productivity. By 2030, we anticipate that crop yields will increase by some 55 percent and that food crop prices will have fallen to roughly half of 2005 levels. At that time, if the International Energy Agency’s crude oil price predictions are accurate, we expect biofuel production would cost-effectively offset between 40 and 50 million barrels of oil per day, or about 40 percent of the total global need. If agricultural supply increases at half that rate, biofuel volumes would drop to roughly half that level. This supposes, of course, that the agricultural supply base develops as we’ve assumed and the biofuel infrastructure continues to expand.
Perception: Biofuel crops will crowd out food crops, driving food prices up and food consumption down in the developing world.
Reality: If crop yields and agricultural productivity improve at historical rates, future food prices need not be higher than they are today.
Some in the media have blamed biofuels for the recent run-up in food prices — for corn in the U.S., tortillas in Mexico, pasta in Italy. Although biofuels are a contributor, current volumes are too small to account for these recent regional commodity price spikes. Other factors such as droughts and inventory levels have had a significant impact.
Despite this evidence, critics maintain that over time biofuel production will almost certainly outpace that of food crops, resulting in greater malnutrition, particularly in poorer parts of the world. These arguments are persuasive, but the developing world’s food woes cannot be laid entirely at biofuels’ door. Farmers in these markets are already at a disadvantage when it comes to accessing the latest agricultural practices and information on yield improvements. In addition, government policies, lack of infrastructure, political instability, and cheaper imports from the U.S. and Europe further depress crop yields in these areas, causing global consumers to lose up to 30 percent of their potential agricultural production today.
Replacing the appetite for petroleum with a taste for biofuels would no doubt result in the consumption of substantial agricultural resources. However, there is significant additional rain-fed land in the world available for agricultural production, according to the FAO and other global authorities.
In short, food prices in a world with biofuels will be higher than in a world without biofuels, but they will not necessarily be higher than they are today.
Perception: Biofuel development robs water-stressed countries of their most precious natural resource.
Reality: Although biofuel development does place additional strain on water resources, there are major agricultural zones in the world that suffer water scarcity regardless.
The vast majority of the globe’s agricultural regions can rely on the natural rain cycle for water. Two rather urgent exceptions are India and northern China. In these countries, not only is water quantity a problem, but so is water quality. China and India’s brisk economic growth will only exacerbate this crisis, as their growth is fed by ever-increasing amounts of food and fuel. Petroleum supply cannot keep up with demand even now; both countries are already dependent on imported oil. Meanwhile, water availability limits their domestic production of food. Imports will increasingly be a requirement, forcing a choice between food and fuel security.
Agriculture consumes more water, by far, than any other sector. Biofuel production requires water, but growing feedstock consumes much more. In other words, it is agricultural activity — not biofuel development per se — that diminishes the quantity and quality of available water in India and northern China. The solution to the water crisis in these regions will be found in sound policy and the development of a reliable and diversified portfolio of import sources for both food and fuel.
Perception: Government mandates and subsidies provide the necessary foundation for the development of the biofuel industry.
Reality: Government intervention can trigger unintended consequences, negating the intended benefits of biofuels.
Governments around the world have offered favorable tax treatment, low-cost loans and research funds for the development of biofuels, and a biofuels infrastructure chiefly to promote energy security, reduce GHG emissions, and protect domestic agriculture. Over time, however, greater government emphasis on biofuels puts upward pressure on food commodity prices, and tariffs and quotas have shut out economically viable options in favor of local alternatives. For example, protectionist policies in the U.S. have effectively eliminated imports of Brazilian cane ethanol.
In certain instances, regulatory support of biofuels has had obvious deleterious effects. European mandates supporting biofuel production prompted certain Southeast Asian countries to burn forests and peat lands to produce palm oil for ethanol. The resulting GHG emissions were dangerously high.
Policies can furnish the necessary impetus to develop valuable new technologies and establish new infrastructure; the Brazilian government’s promotion of cane ethanol is the perfect example. However, policymakers must walk a fine line in promoting long-term beneficial behaviors to avoid short-term detrimental consequences. They need to pave the way to an orderly transition by introducing incentives that are broad enough to encompass long-term optimal technologies and specific enough to focus on those with the most potential.
After separating truth from fiction, our conclusion is that with sound policies in place and healthy innovation, we can expect biofuels to become a viable alternative to fossil fuels in the long term. And as we look toward the world’s biofueled future, government leaders and economists should be mindful of the consequences and implications of various policy solutions:
Current agricultural rules in Organisation for Economic Co-operation and Development (OECD) countries, including farmer subsidies and restrictions on imports, lower world food prices and reduce the incentive for developing countries to develop their own agricultural supply.
Biofuel subsidies, tax exemptions, and blending mandates exacerbate biofuels’ upward pressure on food prices.
Infant-industry support may provide the required incentive to establish the infrastructure necessary for biofuels, such as flex-fuel power trains, fueling stations, and transportation infrastructure.
Political stability, land rights, and infrastructure are necessary prerequisites to developing functioning agricultural markets in developing countries.
Availability of capital and know-how is essential for developing countries to establish a biofuels industry.
Reliable and diversified import sources can address food and fuel security issues in water-stressed countries.
With careful attention to these issues, business and government leaders around the world can develop a sustainable approach to biofuels that makes the most of biofuel's economic and environmental advantages.
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by Bill Jackson, a senior vice president with Booz Allen Hamilton in Chicago &
Eric Spiegel, senior vice president with Booz Allen in McLean, Va. He leads the firm’s work in global energy and utilities &
Leslie Moeller, a vice president with Booz Allen in Cleveland.
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3
FMCG SHOPTALK - SOUTH AFRICA
Consumption by credit
Woolworths and Massmart’s financial results for the six months to June – published last week – highlight once again the all-consuming character of the credit crunch.
Although Massmart delivered a satisfactory profit growth performance, the Group reported clear evidence of a consumer pullback. Not only has real Group sales growth dipped, but more and more customers are keeping their credit cards well beyond harm’s reach.
Top-end retailer Woolworths is especially vulnerable to the credit crunch. Bad debts have rocketed by 80%, and the retailer has had to hold back on extending new credit.
The retailer has observed a steady deterioration in its consumer spend since last September, and is responding with a distinctly defensive price and cost control strategy, reducing entry-level and basic goods prices to ensure competitiveness. That self-restraint is physically visible too – space growth objectives have shifted from C-stores to fewer, large format, full line food stores. The emphasis has landed squarely on value for money – for the retailer and its customers alike.
The discounted price approach has been less of a challenge for Massmart’s high-volume, low-cost, low-margin divisions, but their supporting promotional efforts have been no less vigorous. And my inbox proves it!
Of course, the higher up the consumption chain, the greater the risk of consumption by credit. Last week, mainstream clothes retailer Truworths reported a 66% growth in its bad debts.
Figures released by the Reserve Bank last week outline the full extent of the proverbial
iceberg. Households are currently using a disturbing 11% of disposable income to pay interest on debt while banks’ bad debts are growing at an alarming pace. There has also been a steep decline in the growth of household net wealth since the second quarter of last year. This month, debt counselling company Consumer Assist said that South Africa needs 2 500 more debt counsellors to service the needs of more than six million debt-beset consumers.
Retail may be on the back foot, but it has planted its other foot firmly in front. Massmart has been particularly vocal about life-beyond-the-tunnel. And, if Absa’s CEO is to be believed, the sector – and its supporters – will be on top of their game come the Soccer World Cup.
4
MY UNFASHIONABLE LEGACY
Participative management has proven its remarkable
capabilities again and again. So why is it passing
into obscurity?
by Ralph Sink, courtesy strategy+business magazine
(USA)
The last few years have been bittersweet for people like me, pioneers of high-performance systems with decades of experience. The high-performance systems approach — also known as self-organizing teams and participative management — endows people throughout an enterprise with the skills, understanding, processes, and authority they need to make their own decisions on behalf of quality and business success, instead of having all the ideas and commands flow from the top.
Experiments in self-managing teams were once controversial, but they created so many solid performance gains at companies such as Procter & Gamble, Crown-Zellerbach, General Foods, and General Motors that they are now mainstream. I have seen firsthand how powerful and profitable it can be to give people the room to design their own workflow and manage their own processes.
Despite the successes of high-performance systems, the concept is less fashionable in management circles than it used to be. Some leaders of the field, including Eric Trist and Fred Emery, pioneers of “sociotechnical systems,” have passed away. Others, like Charles Krone, a key developer of the high-performance technician system that Procter & Gamble has used since the late 1960s, are retired or semiretired. Some companies that once made major commitments to high-performance systems have slid back to authoritarian management, even if it leads to decreased productivity.
The next generation of managers, particularly on the operations and shop-floor side, don’t always have the skills and training to design, create, and lead high-performance systems, and there’s a real danger that this knowledge could be lost entirely. Now is the time for my colleagues and me to cast our minds back and distinguish, once and for all, the factors that made us succeed.
Step-Change Improvement
Here, then, is my story. In 1978, I was a senior engineer at a DuPont plant in Martinsville, Va., that had been founded in 1941 to make nylon; it was still being used to produce a variety of textiles. DuPont hired Charlie Krone to regenerate two plants, of which one, at Martinsville, was a union site. My first thought was that Krone’s approach would be just another “flavor of the month.” But after two sessions with him, I was a believer. His initial design sessions systematically gave our shop-floor teams more perspective and training than they’d ever had before.
He deliberately used a Socratic method of asking questions that helped people see problems and solutions more clearly for themselves, and he established well-defined goals and conducted open conversations about work issues so that teams could work together more coherently. Supervisors, freed from the need for heavy supervision and control, could then focus their attention on collaborating to make operational and product improvements. Such a shift takes attention, a basic respect for employees, and an investment of time.
Yet almost immediately, we saw results at the Martinsville plant. There was a dramatic increase in quality and a decrease in cost; our textile brands became more competitive. In 1983, we negotiated an early retirement opportunity with the union in which we reduced management from eight levels to four, operators picked up many of the routine tasks that supervisors had handled in the past, and we downsized the factory by several hundred employees without rancor. The plant still ran at capacity.
The operators became innovators: One team designed a US$60,000 spinning unit that solved a technical problem that the engineering department had said would cost $2 million to fix, and another created a sophisticated and efficient supply chain that delivered the right quantities of fabric at the right times to a large customer. (This was years before the phrase “just-in-time” had caught on.)
We also kept our part of the bargain; when the operators saved us millions of dollars a year by managing inventories more precisely, we used that money to seek new business rather than to lay people off. The shift in responsibility served me well personally, because it allowed me to focus on developing products and building customer relationships, which brought me to the attention of other companies in the region.
In 1990, I took a job as director of operations for CPFilms, a manufacturing firm that had been recently acquired by the British chemical company Courtaulds (the “CP” stands for Courtaulds Performance). Based, like the DuPont plant, in Martinsville, this division made electromagnetic spectrum polyester film used in automobile and architectural windows. I left my secure, comfortable job at DuPont, where I’d been for 21 years, with the understanding that I would have a free hand to implement high-performance systems.
Indeed, that was the only way I could imagine achieving the financial results that Courtaulds wanted. The market share of the whole business unit was falling; quality was poor; we had massive inventory costs; production was rife with infighting; there were regular bomb threats at the factory and lost-time injuries at least once every three weeks; on Monday mornings, some operators were too hung over to work; and customers were looking for alternatives. The CPFilms executives, all located two hours away, had grown up in the “old school” of empty presentations and high levels of control. They were all ready to sell the place off, and would have done so if not for the effect that selling at a loss would have on the stock price. Instead, out of desperation, they gave me a relatively free hand.
“The Floor Did It”
I took on the task of simultaneously improving results, managing day-to-day activities, and transforming the company. This transformation began with three basic objectives: to maximize our competitive position, to improve the quality of our thinking, and to create a culture of continuous improvement. I laid out a basic principle: Before making any decisions, the division’s managers would seek the maximum intelligence of all relevant and affected people. Decisions would be openly communicated before being implemented, and challenges to them would be welcomed, provided the challenges were based on logic and sound business.
Everyone was skeptical — operators, maintenance personnel, and upper management. I knew that the first people to see the value of high-performance systems would be those most immediately connected to production, innovation, and quality: the operators. Then interest might spread to frontline supervisors, to the maintenance group, to the middle managers, and, finally, to the marketing and sales managers. All these groups had to be knit together, so we started by creating task forces to solve problems that were frustrating the operators and hurting the business.
The first group called themselves the “dust busters.” The dyehouse where CPFilms added color to polyester was hot, dirty, and overwhelmed by problems with quality and production. Morale was so bad in that shop that, when an operator with 30 years of service fell from a faulty ladder and broke his collarbone, he was too afraid of losing his job to list the real reason on the paperwork. Blaming the ladder would mean blaming the manager who hadn’t repaired it, so he wrote down that “the floor did it.”
With me cheerleading and protecting them, the dust busters started to clean up the plant. Our safety program explicitly stated that the company had to provide a safe environment and reliable tools and that everyone would be responsible for their own safety and that of their fellow employees. This was a sign that management was paying attention. “Maybe they really care about us,” people said.
Then we went further. “Everyone will be a businessperson,” we declared. “And layoffs will not result from our improvement efforts.” This meant that we would give up the long-standing (and much-disliked) practice of hiring people during good times and letting them go during our seasonal downturns. Talk about culture shock! It also meant giving blue-collar workers tasks and responsibilities that had once been reserved for managers. For instance, when we bought new equipment, the operators visited other sites that used that machine, and then budgeted and installed the machine themselves.
We also elevated everyone’s thinking about quality. “If the work coming to your station is not of sufficient quality,” we told assembly line workers, “you can either refuse to accept it (and let us know) or even stop the production machine, and you will not get fired.”
Eventually, someone tried it, and we kept our word. After that, other changes followed more quickly, including pay reforms that rewarded employees for learning new skills. The improvements added to the company’s profitability, and that in turn meant added job opportunities. In time, the operators were not only willing but eager to try experiments that might help the plant beat the competition. They would bring competitors’ products on the floor and help us reverse engineer them.
As the CPFilms managers and employees grew more comfortable talking together freely, I knew it was time for us to come up with principles as a group. A principle is just a commonly held guide for thinking, behaving, and making decisions. You can manage a process or machine with regulations, rules, and procedures, but if you want the best chance to capture people’s latent potential, then you start with principles that people “own” and help create. One of ours read: “We will enable each other to be the best at what we do and we will integrate the excellence of individuals, teams, and functions in a way that satisfies our customers and stakeholders.” No boss could impose that from the top; when we crafted it together, however, we could live by it.
Being a People Person
We then created three informal business units within manufacturing, each with its own P&L accountability. This was important because employees want to be a vital part of a self-contained team to which they can have allegiance. We moved the quality control lab equipment onto the shop floor, and provided training so the operators could conduct their own tests. This did not make us popular with the corporate staff, of course, but it dramatically improved our results.
In another bold move, we stopped the traditional practice of selling substandard products to our second-class customers; this had made us some quick money, but had gradually eroded our image in the market. The hardest part was avoiding the implication that the previous approach had been wrong, in a company where everyone had colluded with those outmoded methods by simply following procedure.
We then brought together quality, manufacturing, and research managers, deliberately picking the people who argued with one another most vehemently, and sent them out in groups to visit our customers’ factories — something some of them had never done before. The sales departments protested that this would interfere with their relationships, and the manufacturing managers protested that they didn’t have time. But we sent them anyway, and what they encountered was unhappy customers. Our managers returned from these trips to customer sites with a great deal more respect for one another, and resolved to fix our company’s quality problems. The shift in attitude was both immediate and lasting.
Within the first year, we made a 35 percent performance improvement. It worked so well that our division head promoted me to global vice president of human resources for CPFilms. “You seem to like people,” he said. “You spend so much time with them.” In other words, he didn’t get the point that people were the key to performance. I resolved to redefine HR, taking it from an administrative function to a driver of business results by helping people reach their potential. I placed a world map on my office wall, and marked all our plants and distribution sites with flags. Every spot with a flag was a location ripe for changing our thinking.
We suffered a major setback when a new division CEO arrived at CPFilms who did not seem to believe in human development and who saw manufacturing as a liability. He pulled back the training that was a critical part of the team system, and he used our gains in productivity to mandate new head-count cuts nearly every Monday. One night, we both attended a dinner meeting with his boss, a Courtaulds vice president. The VP asked me how the people were doing. “We’re still making improvements,” I said, “but it’s despite ourselves. We’re going to get a union if we keep this up.” This breach of hierarchical decorum infuriated the division CEO; he later chewed me out, and, for the next three months, he barely said good morning to me. We continued the layoffs.
Then, one rainy February morning, I arrived at the plant to confront picket signs. Labor union organizers had gathered signatures from more than 65 percent of the employees. The CEO charged into my office, demanding to know how, as head of HR, I had let this happen. When I pulled together the frontline supervisors, they said that although they supported the organizing effort — “You management are getting what you deserve” — they didn’t actually want to be unionized. They wanted to go back to our team system. So did the other employees, they said. That turn of events helped me negotiate an agreement: There would be no union, we’d reinstate the high-performance approach, and we would guarantee that no layoffs would result from any improvements we made in productivity in the future.
No Such Thing as Commodities
That was 1993. For the next 12 years, there were no layoffs. Our housekeeping, maintenance, environmental, and safety records were as good as any company’s in the world; you could eat off the floors in the plant. With our quality intact, our business grew. Revenue increased more than 100 percent; margins improved by 55 percent or more. Production doubled, profits were three times the industry average (an improvement of 650 percent), and on-time delivery rose 30 percent, to almost 98 percent. Safety, the first problem we’d addressed, was now world class; we went two years without a lost-work accident at any plant anywhere in the world. Waste decreased dramatically; one product line reduced its waste level from 13 percent to 2 percent. When I expressed satisfaction, the technicians responded, “Actually, we know we can get it to zero.”
One critical factor was our workers’ ability to gain individually from these results. We had said that pay would increase after business successes, and we lived up to that promise. We made it easy for people to take on new tasks and build new skills, working closely with business and technical colleges in the area. We set a corporate goal: becoming the employer of choice in our area. We gave people pay increases when they learned and used new capabilities, and we promoted them for merit and promise, not seniority, through an open process involving written or oral tests (their choice) and a peer review.
At one point, the Courtaulds vice president of finance tried to block our pay-for-skills approach. “You’re just giving away money to be popular,” he told me. “For every $80,000 in pay increases, I will cut four people.” But he dropped that threat after the next quarterly cycle, when we made far more in income than we were spending on pay increases.
Visitors to CPFilms plants often said, “If we had your people, we could do this too.” And I would just smile. After all, a dozen years before, management had wanted to displace these very same employees.
And a high-performance approach is not limited to production. I have seen it applied to marketing in the chemical industry, for example, although many people believe that chemicals are necessarily commodities. I believe that there is no such thing as a commodity business. You can always create distinctiveness that leads to higher value, new markets, and higher margins, if you are willing to apply thinking, creativity, energy, and care.
Now that I have retired from CPFilms and am operating as an independent consultant, I think I understand better why it is sometimes hard to keep systems like this going in today’s corporations. Many new managers, trained as engineers, expect to run operations according to step-by-step recipes. But just as thinking isn’t brainstorming and learning isn’t rote memorization, managing a high-performance system isn’t a matter of following rules and procedures.
You have to observe the systemic whole of an operation — not just what people are doing and saying, but their latent potential for contributing to the business, which is often nearly invisible because it has been repressed for so long by management. And then you have to translate that integrative, almost poetic understanding into everyday nuts-and-bolts decisions about scheduling, maintenance, incentives, workflow, and technological design.
You then have to build the authority to insist on accountability and performance — including insisting on getting it from your superiors — but you also have to give up authority to anyone who is capable of wielding it effectively. You have to trust that, given the same information you have, other people will come to logical decisions and actions that are as good as, or even better than, your own. And you have to accomplish all this in corporations that set up incentives (such as stock options) that punish long-term investment and favor short-term measures: cutting head counts, selling off underperforming businesses, and cashing in on quick gains.
No wonder the self-managing teams approach is endangered. And yet, I cannot help but believe that it will prevail in the end. Ultimately, the most critical factor is managers’ view of human nature. Managers who believe in the value of people’s diverse skills, desires, aspirations, ambitions, and enthusiasm and who are prepared to recognize and reward the quality of thinking that people bring to their work — no matter what the organizational impediments seem to be — are capable of running a high-performance organization. The concept may not always be in fashion, but there are many of us out there, ready to put it into practice, if only we get the knowledge and the courage to follow through.
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Ralph Sink is a consultant on high-performance systems who has worked extensively with Charles Krone and is currently an associate with Generon Consulting in Cambridge, Mass,.
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5
THE END OF CHEAP FOOD
Rising incomes in Asia and ethanol subsidies in
America, in an international context, have ended a
long period of falling food prices.
In 2008, the world will see food prices beginning to rise – a significant trend which is set to continue.
In general terms, the world has experienced a continuing slide in food prices, notwithstanding in an era when farming has been on the decline.
In 1974-2005, food prices on world markets fell by three-quarters in real terms. Food today is so cheap that the West is battling gluttony even as it scrapes piles of half eaten leftovers into the bin.
One of the odd features of the election vote in Venezuela in December 2007 was that staple foods were in short supply. Something similar happened in Russia before its parliamentary election. Governments in both oil rich countries had imposed controls on food prices, with the usual consequences. Such controls have been surprisingly widespread – a knee-jerk response to one of the most remarkable changes that food markets, indeed any markets, have seen for years: the end of cheap food.
That is why this year’s price rise has been so extraordinary. Since the spring, wheat prices have doubled and almost every crop under the sun - maize, milk, oilseeds, you name it – is at or near a peak in nominal terms. The Economist magazine’s food price index is higher today than at any time since it was created in 1845. Even in real terms, prices have jumped by 75% since 2005.
No doubt farmers will meet higher prices with investment and more production, but dearer food is likely to persist for years. That is because “agflation” is underpinned by long-running changes in diet that accompany the growing wealth of emerging economies – the Chinese consumer who ate 20 kg of meat in 1985 will scoff over 50kg of the stuff in 2007. That in turn pushes up demand for grain: it takes 8kg of grain to produce one of beef.
But the rise in prices is also the self-inflicted result of America’s reckless ethanol subsidies. This year, biofuels will take a third of America’s (record) maize harvest. That affects food markets directly: fill up an SUV’s fuel tank with ethanol and you have used enough maize to feed a person for a year. And it affects them indirectly, as farmers switch to maize from other crops. The 30 million tonnes of extra maize going to ethanol this year amounts to half the fall in the world’s overall grain stocks.
Dearer food has the capacity to do enormous good and enormous harm. It will hurt urban consumers, especially in poor countries, by increasing the price of what is already the most expensive item in their household budgets. It will benefit farmers and agricultural communities by increasing the rewards of their labour; in many poor rural places it will boost the most important source of jobs and economic growth.
Although the cost of food is determined by fundamental patterns of demand and sup-0plym, the balance between good and ill also depends in part on governments. If politicians do nothing, or the wrong things, the world faces more misery, especially among the urban poor. If they get policy right, they can help increase the wealth of the poorest nations, aid the rural poor, rescue farming from subsidies and neglect - and minimise the harm to the slum-dwellers and landless labourers. So far, the outlook appears gloomy.
In the Trough
That, at least, is the lesson of half a century of food policy. Whatever the supposed threat – the lack of food security, rural poverty, environmental stewardship – the world seems to have only one solution: government intervention. Most of the subsidies and trade barriers have come at huge cost. The trillions of dollars spent supporting farmers in rich countries have led to higher taxes, worse food, intensively farmed monocultures, overproduction and world prices that wreck the lives of small farmers in the emerging markets. And for what? Despite the help, plenty of Western farmers have been beset by poverty. Increasing productivity means you need fewer farmers, which steadily drives the least efficient off the land. Even a vast subsidy cannot reverse that.
With agflation, policy has reached a new level of self-parody. Take America’s supposedly verdant ethanol subsidies. It is not just that they are supporting a relatively dirty version of ethanol (far better to import Brazil’s sugar based liquor); they are also offsetting older grain subsidies that lowered by prices to encourage overproduction. Intervention multiplies like lies. Now countries such as Russia and Venezuela have imposed price controls - an aid to consumers – to offset America’s aid to ethanol producers. Meanwhile, high grain prices are persuading people to clear forests to plant more maize…forcing the price to increase markedly.
Normally sky-high food prices reflect scarcity caused by crop failure. Stocks are run down as everyone lives off last years stores. Last year harvests have been poor in some places, notably Australia, where the drought-hit wheat crop failed for the second year running. And world cereals stocks, as a proportion of production, are the lowest ever recorded. The run down has been accentuated by the decision of large countries (America and China) to reduce stocks to save money. And the extreme winter conditions in the northern hemisphere, particularly China, are likely to cause a shortfall in the next harvest.
Dearer food is a chance to break this dizzying cycle. Higher market prices make it possible to reduce subsidies without hurting incomes A farm bill is now going through America’s Congress. The European Union has promised a root-and-branch review (but not yet reform) of its farm-support scheme. The reforms of the past few decades have, in fact, grappled with the rich world’s farm programmes - but only timidly. Now comes the chance for politicians to show that they are serious when they say they want to put agriculture right.
Cutting rich-world subsidies and trade barriers would help taxpayers; it could revive the stalled Doha round of world trade talks, boosting the world economy; and, most important, it would directly help many of the world’s poor. In terms of economic policy, it is hard to think of a greater good.
Where government help is really needed
Three-quarters of the world’s poor live in rural areas. The depressed world prices created by farm policies over the past few decades have had a devastating effect. There has been a long term fall in investment in farming and the things that sustain it, such as irrigation. The share of public spending going to agriculture in developing countries has fallen by half since 1980. Poor countries that used to export food now import it.
Reducing subsidies in the West would help reverse this. The World Bank reckons that if you free up agricultural trade, the prices of things poor countries specialise in (like cotton) would rise and developing countries would capture the gains by increasing exports. And because farming accounts for two thirds of jobs in the poorest countries, it is the most important contributor to the early stages of economic growth. According to the World Bank, the really poor get three times as much extra income from an increase in farm productivity as from the same gain in industry or services. In the long term, thriving farms and open markets provide a secure food supply.
However, there is an obvious catch – and one that justifies government help. High prices have a mixed impact on poverty: they hurt anyone who loses more from dear food than he gains from a higher income. And that means over a billion urban consumers (and some landless labourers), many of whom are politically influential in poor countries. Given the speed of this years food price rises, governments in emerging markets have no alternative but to try to soften the blow.
Where they can, these governments should subsidise the incomes of the poor, rather than food itself, because that minimises price distortions. Where food subsidies are unavoidable, they should be temporary and targeted on the poor. So far, most government interventions in the poor world have failed these tests - politicians who seem to think cheap food part of the natural order of things have slapped on price controls and export restraints, which hurt farmers and will almost certainly fail.
The sharp increase in producing ethanol is the dominant reason for this year’s increase in grain prices. It accounts for the rise in the price of maize because the US federal government has in practice waded into the market to mop up about one-third of America’s corn harvest. This will continue, making the desire for cheaper biofuels the cause of rising food prices.
Part of the changes is the rise and rise of wealth in China and India. This is stoking demand for meat in those countries, in turn boosting the demand for cereals to feed to animals. The use of grains for bread, tortillas, and chappatis is linked to the growth of the world’s population. It has been flat for decades, reflecting the slowing of population growth.
Higher incomes in India and China have made hundreds of millions of people rich enough to afford meat and other foods. In 1985 the average Chinese consumer ate 20kg of meat a year; now they eat more than 50kg. And several other developing countries are, or will shortly, move down the same path in terms of consumption of meat and many other foods.
The issue of rising food prices is far more complex than initially recognised. Sadly, while many government have begun to tune in to the important need to address climate change, very few in the world is really focused on this fast emerging food shortage problem. The only solution seems to be sharp increase in farm, productivity and ’smarter’ farming practices.
Australia is not remote to all of this. According to a Dairy Australia prices report, the world market price of cheddar cheese and powdered milk more than doubled in 2007 while the price of butter rose by 160 per cent. Australia has thus far also failed to recognise that agriculture policy is as much a defence policy, a refugee policy, immigration policy, environmental policy as well as health, food and economic policy.
While a distinct water shortage crisis looms for the world in the next thirty years, the issue of food shortages is likely to emerge much sooner.
Over the past few years, a sense has grown that the rich are hogging the world’s wealth. In poor countries, widening income equality takes the form of a gap between city and country incomes which have been rising faster for urban dwellers than rural ones. If handled properly, dearer food is a once–in-a-generation chance to narrow income disparities and to wean rich farmers from subsidies and help the poorer ones. The ultimate reward, though, is not merely theirs: it is to make the world richer and fairer.
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by Graeme Orr, CEO Sales & Marketing Institute
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6
FMCG : WILL ORGANIC FOOD REALLY SAVE THE
EARTH?
If you think you can make this planet better by
clever shopping, think again. You might just make
it worse.
courtesy The Economist
"You don't have to wait for government to move...the really fantastic thing about Fairtrade is that you can go shopping!". So said a representative of the Fairtrade movement in a British newspaper this year. Similarly (the interestingly named) Marion Nestle, a nutritionist at New York University, argues that "when you choose organics, you are voting for a planet with fewer pesticides, richer soil and cleaner water supplies."
The idea that shopping is the new politics is certainly seductive.
Never mind the ballot box: vote with your supermarket trolley instead. Elections occur relatively rarely, but you probably go shopping several times a month, providing yourself with lots of opportunities to express your opinions. If you are worried about the environment, you might buy organic food; if you want to help poor farmers, you can do your bit by buying Fairtrade products; or you can express a dislike of evil multinational companies and rampant globalisation by buying only local produce. And the best bit is that shopping, unlike voting, is fun; so you can do good and enjoy yourself at the same time.
Sadly, it's not that easy. There are good reasons to doubt the claims made about three of the most popular varieties of "ethical" food: organic food, Fairtrade food and local food. People who want to make the world a better place cannot do so by shifting their shopping habits: transforming the planet requires duller disciplines, like politics.
Buy Organics, Destroy the Rainforests
Organic food, which is grown without man-made pesticides and fertilisers, is generally assumed to be more environmentally friendly than conventional intensive farming, which is heavily reliant on chemical inputs. But it all depends what you mean by "environmentally friendly".
Farming is inherently bad for the environment: since humans took it up around 11,000 years ago, the result has been deforestation on a massive scale. But following the "green revolution" of the 1960's greater use of chemical fertiliser has tripled grain yields with very little increase in the area of land under cultivation.
Organic methods, which rely on crop rotation, manure and compost in place of fertiliser, are far less intensive.
So producing the world's current agricultural output organically would require several times as much land as is currently cultivated. There wouldn't be much room left for the rainforest.
Fairtrade food is designed to raise poor farmers' incomes.
It is sold at a higher price than ordinary food, with a subsidy passed back to the farmer. But prices of agricultural commodities are low because of over-production. By propping up the price, the Fairtrade system encourages farmers to produce more of these commodities rather than diversifying into other crops and so depresses prices - thus achieving, for most farmers, exactly the opposite of what the initiative was intended to do. And since only a small fraction of the mark-up on Fairtrade foods actually goes to the farmer -most goes to the retailer- the system gives rich consumers an inflated impression of their largesse and makes alleviating poverty seem too easy.
Surely the case for local food, produced as close to possible to the consumer in order to minimise "food miles" and, by extension, carbon emissions, is clear? Surprisingly, it is not. A study of Britain's food system found nearly half of food vehicle miles (ie, miles travelled by vehicles carrying food) were driven by cars going to and from their shops. Most people live closer to a supermarket than a farmer's market so more local food could mean more food-vehicle miles. Moving food around in big, carefully packed lorries, as supermarkets do, may in fact be the most efficient way to transport the stuff.
What's more, once the energy used in production as well as transport is taken into account, local food may turn out to be even less green.
Producing lamb in New Zealand and shipping it to Britain uses less energy than producing British lamb, because farming in New Zealand is less energy intensive. And the local-food movement's aims, of course, contradicts those of the Fairtrade movement, by discouraging rich-country consumers from buying poor-country produce. But since the local-food movement looks suspiciously like old-fashioned protectionism masquerading as concern for the environment, helping poor countries is presumably not the point.
Appetite for Change
The aims of the ethical food-movement- to protect the environment, to encourage development and to redress the distortions in global trade are admirable. The problems lie in the means, not the ends. No amount of Fairtrade coffee will eliminate poverty, and all the organic asparagus in the world will not save the planet. Some of the stuff sold under an ethical label may even leave the world in a worse state, and its poor farmers poorer than they otherwise would be.
So what should the ethically minded consumer do? Things that are less fun than shopping, alas. Real change will require action by governments, in the form of a global carbon tax; reform of the world trade system; and the abolition of agricultural tariffs and subsidies, notably Europe's monstrous common agricultural policy, which coddles rich farmers and prices those in the poor world out of the European market.
Proper free trade would by far be the best way to help poor farmers. Taxing carbon would price the cost of emissions into the price of goods, and retailers would then have an incentive to source locally if it saved energy. But these changes will come about only through difficult, international, political deals that the world's government have so far failed to do.
The best thing about the spread of of the ethical-food movement is that offers grounds for hope. It sends a signal that there is an enormous appetitiute for change and widespread frustration that goivernment s are not doing enough to preserve the environment, reform world trade or enciourage development. Which suggest that, if politicians put these options on the political menu, people might support them. The idea of changing the world by voting with your trolley may be beguiling. But if consumers really want to make a difference, it is at the ballot box they need to vote
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courtesy of The Economist (UK)
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7 THE ENERGY-EFFICIENT SUPPLY CHAIN
How to reduce energy consumption and carbon output
in procurement, production, and distribution.
Courtesy of strategy+business by Peter Parry,
Joseph Martha, and Georgina Grenon
As concerns mount about fuel prices, long-term energy availability, and climate change, companies’ attention is finally turning toward one of the most pervasive places where energy can be conserved: the industrial supply chain. Simply put, the supply chain is the production and distribution network that encompasses the sourcing, manufacturing, transportation, commercialization, distribution, consumption, and disposal of goods, from the ore mine to the trash can.
Four primary factors drive businesses’ interest in the energy-efficient supply chain. First is the desire to cut energy costs. Second is concern about regulation — through trading permits, mandated caps, and other means, governments will increasingly press businesses to limit the amount of carbon they release. Third, a growing segment of customers favor companies that credibly demonstrate reduction of carbon impact. The fourth driver is productivity: The economies that a company like Wal-Mart or Tesco puts in place to reduce emissions can reduce other costs and improve operations as well.
On January 18, 2007, Tesco CEO Terry Leahy announced that the retail chain would reduce the carbon footprint of all stores and distribution centers by 50 percent over the next 15 years. That kind of target cannot be realized by placing unilateral pressure on suppliers. It requires efforts that build trust and transparency along the value chain. When suppliers and customers understand one another’s contributions to carbon emissions, they can identify ecological and economic waste that would otherwise be hard to see.
For example, in 2006, the Carbon Trust, a United Kingdom–based research and advisory group, discovered a “perverse incentive” in the sourcing of raw potatoes for manufacturing snack foods. (The analysis appeared in the group’s report, “Carbon Footprints in the Supply Chain: The Next Step for Business.”)
Charged with studying the carbon footprint of potato chips, the Trust’s researchers found that because prices are set by weight, farmers typically control humidification to produce moister and therefore heavier potatoes. Even within the strictly limited specifications of moisture content set by the food manufacturers, these few grams of extra water are significant. The extra cooking needed to burn them off accounted for an unexpectedly high percentage of the chips’ energy consumption.
An obvious solution, wrote the Carbon Trust, would be to change the procurement contract — to provide farmers with an incentive to produce potatoes with less moisture. This would better position the manufacturers to take advantage of carbon trading credits and other regulations for greenhouse gas reduction. And it would set a precedent for further collaboration between food makers and their agricultural suppliers.
Similar approaches have been used to study the energy footprints of a range of products, from the United Kingdom’s Mirror newspaper chain, to Unilever’s Vaseline hand lotion, to cameras made by Kodak and Hewlett-Packard. Even though it has been 15 years since the pioneer packaging-reduction incentives of Germany’s “Green Dot” labeling program were put into effect, there is still much to learn about the waste of energy and materials in the typical supply chain.
In the potato chip case, for example, production-related greenhouse gases dwarfed the emissions from transportation. In other cases, transportation and logistics are much bigger factors, with enormous potential gains. A 1993 study of Landliebe Yogurt (a local brand made and sold in Stuttgart, Germany) revealed that the ingredients in a single container — including milk, strawberries, wheat, cultures, glass for the jar, paper for the label, and aluminum for the lid — had traveled a total of more than 9,100 kilometers (about 5,600 miles) before reaching the consumer’s hands.
Some of the innovations of the next five years will focus on reducing this type of inefficiency. Marks and Spencer, for example, has a specific initiative under way to reduce “food miles,” sourcing its wares from nearby locales and working with local farmers to increase the growing season. Other initiatives will increase transportation efficiencies: A truck that once carried 150 items will now carry 300, or carry the same volume of goods with less fuel. Other projects will reduce and simplify packaging, closely track the joules consumed, or switch to less carbon-intensive materials and energy sources (such as renewable energy and more efficient lighting sources).
Already, some business-to-business producers and service providers, including gasoline retailers and airlines, are using government-mandated pollution credits to offer climate change–conscious services for customers (“buy our product and help offset your own greenhouse gas impact”).
As businesses become more and more serious about this, managers will increasingly find themselves asking, What is it about the way we operate that causes our entire supply chain to waste energy? There will be many surprises. One should not conclude that all lightweight snacks, nearby farms, or recycled materials are preferable from a climate change perspective. Every supply chain is different, with unique opportunities for using information technology, management practice, incentives, and sheer common sense to reduce the carbon footprint.
The first step is thus understanding the specific carbon footprint of your business’s supply chain, in the context of overall strategy and operations. The second step is discerning the extent to which emissions are related to your specific needs, versus those inherent in supply chain management.
The third is defining your approach. It is likely to be a combination of three types of measures: reducing your footprint through demand reductions and energy efficiency in design, construction, and operation; replacing conventional energy sources and materials with low- or zero-carbon alternatives, including materials and equipment with low-embodied carbon; and offsetting unavoidable carbon emissions through a program of credit trading and other verified means.
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Authors
Peter Parry is a vice president with Booz Allen Hamilton in London. He specializes in global energy and has 25 years of experience in corporate strategy development, technology management, and commercial negotiations.
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Joseph Martha, a vice president with Booz Allen Hamilton in McLean, Va., is the co-author, with David Bovet, of Value Nets: Breaking the Supply Chain to Unlock Hidden Profits
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Georgina Grenon is a senior associate with Booz Allen Hamilton based in Paris.
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8
MEASURING MARKETING: BEYOND ROI
Too many marketers are adopting too narrow a definition of accountability
courtesy Fast Company magazine (ASMI's favourite business magazine) - by Tim Manners
This may shock you, but if the relationship between media spending and profitable sales volume is the measure, Marlboro cigarettes may be the most accountable brand in marketing today.
As reported recently in BusinessWeek, Marlboro "now owns more than 40% of the market, up more than 2.5 percentage points in as many years." According to Merrill Lynch analyst Christine Farkas, operating profits for Philip Morris (Marlboro's parent) will "reach 28% next year, from 26% in 2004, as net income grows to an estimated $11.4 billion on $66.3 billion in sales in the U.S. and abroad. That's twice the current operating margin of well-run companies like General Electric and Exxon-Mobil and also well beyond Procter & Gamble's 19% margin this year."
Now, we don't know exactly how much money Marlboro spends on its marketing, but Philip Morris acknowledges that it spends less and less on marketing each year. That's because the government won't allow cigarette companies to use mass media to promote their products, which forced Marlboro to innovate and also build a really big database of 26 million of its most loyal customers.
Not only does that approach cost Marlboro a heck of a lot less than mass media advertising, it also builds a kind of loyalty that television, radio and print just can't buy. The brand is able to lavish attention on its fan base -- up to and including "special trips to a ranch it owns in Montana, where vacationers are showered with gifts, eat five-course meals, drink for free and enjoy massages, snowmobiling, horseback riding and the like, all on the company tab."
In other words, Marlboro's customers get to live in Marlboro country, versus just watch it in 30-second increments on television. Which, when you think about it, is a form of accountability to its consumers in itself.
But that's not the point here. The point is that Marlboro is blowing away the field in terms of the ROI on its marketing expenditures, which should make it the most admired marketer in the world today. After all, to read the trade press and to attend industry conferences, "accountability" in marketing is all about quantifying and justifying the money you spend on media, events, and so forth.
Well, if Marlboro is a marketing hero, then something clearly is amiss. At best, it would seem that too many marketers are adopting too narrow a definition of accountability. At worst, it would seem that they are missing the true driver -- or drivers -- of accountability in marketing.
What are those drivers? I asked my friends, Shelley and Robert Forrester of the Forrester Network, because Shelley and Robert are in the business of helping companies find that which truly drives growth in their businesses. "Great question!" they said. We agreed to order in lunch and talk about it.
We also asked my "Cool News" colleagues, Peter F. Eder and Rick Leonard, to join the discussion. It was Peter who came up with what might be a more tenable foundation on which to determine the true meaning of accountability in marketing:
Financial Management (in terms of both media spending as well as profitability);
Design (for products or services; from innovative to copycat to archaic);
Customer Service (from exquisite to irritating);
Social Responsibility (from caring to corrupt);
and Leadership (both internally and externally; from stand-up to hunkered down).
Our platform may not be totally rock-solid but our premise is pretty firm: Achieving true accountability in marketing is a complex, multi-dimensional discipline. It's not a simple matter of figuring out what you're getting for what you're spending on marketing.
However, these many subsets of accountability, we think, roll up into one overarching kind of accountability. That, of course, would be accountability to one's consumer. Sure, that's obvious, but in fact it's a point that seems largely lost amid the current fixation on media spending as the wheelhouse of accountability in marketing.
Not knowing whether we had landed on the moon or simply orbited the conference room, Shelley, Robert, Peter, Rick and I agreed to try to put our premise to the test. Each of us picked a company we admired to analyze against these five measures of accountability -- financial management, design, customer service, social responsibility, and leadership.
Of the five companies we scanned (Patagonia, JetBlue, Apple, Target, and Johnson & Johnson), Patagonia scored highest and J&J the lowest, with the others somewhere in between. Granted, our judgments were subjective, unscientific, and far from comprehensive. In addition, it certainly is not fair to apply essentially the same standards to companies in different categories and in different stages of development. But we think we produced some thought-provoking insights all the same.
All of the companies scored relatively high in at least one area, and relatively low in another. The one company that seemed to do best across the board was Patagonia, the outdoor gear merchant. Of course, because Patagonia is privately held we don't really know how profitable it is. We also don't know how efficiently the company spends its marketing dollars (although it has been praised in the trade press for its apparently enviable integration of catalog, Internet and retail sales).
We do know that company founder and CEO Yvon Chouinard has his own -- and very unconventional -- ideas when it comes to financial management issues: "... I consider the bottom line the amount of good that a business has accomplished over one year," he says, adding: "At Patagonia, profit is not the goal, because, as the Zen master would say, profits happen when 'you do everything else right.'"
Doing things right at Patagonia just might be the inverse of the Marlboro model. Actually, there is one similarity between the two brands -- both make products that are perfectly legal as well as potentially lethal. Patagonia got its start making tools for mountain climbers, and as Chouinard says: "If a tool failed, it could kill someone, and since we were our own best customers, there was a good chance it could be us!"
His very astute observation certainly puts the concept of "accountability" in marketing in a dramatic light. It also underscores a key point about his brand of accountability, which is that it starts from within. Yvon Chouinard doesn't just make gear for outdoor activities; he's an outdoorsman himself. That simple fact seems to inform just about everything he does as a businessman and a marketer.
His first product was a reusable piton (the metal spikes hammered into rocks to secure ropes for mountain climbing). Before Chouinard came along, pitons were left behind; he thought that was not only wasteful but also not great for the environment. Patagonia also has a well-developed sense of style (starting with the romantic name of the brand itself) and a commitment to innovation (including a parka made of recycled plastic Coke bottles, for example).
As for leadership, Chouinard may not be the best-known name in business, but he's out with a new book, an autobiography titled Let My People Go Surfing. The title refers to a company policy that says if the surf's up, employees should feel free to head for the beach if they want to. Obviously, Chouinard trusts his employees to be as accountable to him as he is to them. That attitude certainly projects leadership.
But whether the way Chouinard treats his employees (or any other aspect of his business model) has application to other companies certainly is open to debate. Would it work for McDonald's? For Ford Motor Company? For Marlboro?For your enterprise?
Where do we go with all of this? To be honest, we're not quite sure. Shelley, Robert, Peter, Rick, and I plan to order in some more food and keep thinking about it. If you have some ideas to share, please email us at accountability@reveries.com.
Of this much we are certain: The true meaning of accountability in marketing is something more than what the great mainstream of marketing would have us believe it is.
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courtesy Fast Company magazine (ASMI's favourite
business magazine) - by Tim Manners
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YES! YOUR CONTRIBUTION IS WELCOME.
STR@TEGY WELCOMES ARTICLES FOR CONSIDERATION FOR PUBLICATION.
Articles published in STR@TEGY Newsletter do not necessarily represent the views of either gosalesmarketing.com or the Australian Sales & Marketing Institute, but are published in the spirit of being "challenging, fresh, informative, innovation inspired and, occasionally, hard-hitting".
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Code 30/09/2007
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