Corporate Social Opportunity?
Development Gateway: In your sustainability report you say that "we can build our businesses while contributing our part to help address some of the toughest global health and social issues." You also say that it is P&G's vision that you can link business opportunity with corporate responsibility to create a concept you call "corporate social opportunity." Do you really think it is possible to enter developing countries with a profit making mind-set and achieve social goals at the same time?
George Carpenter: Let me back up a little bit to the genesis of all that. In 1999, at a corporate restructuring, we were trying to figure out what to do with P&G's environmental organization.
There was a lot of concern that despite having made enormous investments in environmental innovations in products and packaging, we never really created a competitive advantage in the sense of a new business; we achieved savings from materials reduction and saved bottom line cost, but we never created new consumers, new markets and new products despite fairly sizable investments. As a result, green marketing had a bad name in our marketing department, in our company and across the business in general.
In 1999, the concept of sustainability was introduced. Because it integrated the social, economic and environmental issues into a holistic framework, we thought there was a potential to build business value around this concept.
The model we used was digital communication. The argument to senior management was that developing countries moved to cellular communications much faster than the North did; while only the rich lobbyist and stockbrokers had cell phones in New York, if you went to Mexico City, everyone had cell phones because the regular phones did not work. Not only was the adoption rate faster, but the developing countries will never build the same hardware infrastructure we did.
Based on these observations, we thought that there is a way to think about consumers we do not serve today, that if we design products specific to their needs and aspirations and the realities of their life, rather than transferring products that were designed for Europe and North America, that we could create large new markets. That was a hypothesis. The key was that we were going to develop products specific to those consumers -- not try to sell them what was left over from the North.
Since then, we have launched several products for the bottom of the pyramid market. The first one was in nutrition; it is a drink mix that provides micro nutrients to children. It was developed when UNICEF approached us to develop a fruit drink with appropriate nutrients for children. We set up to market it in Venezuela, but we got caught in the political instability there. We were doing quite well, we were selling it through McDonalds for example, but it was not reaching the level of people who really had the problem. We needed a lower cost model for that, but did not have the chance to restructure the business given the political instability there, and as we were looking at what we would do next, we sold most of our food and beverage business.
Today we have licensed this product in Nicaragua, and it is sold through a distributor who manufactures and sells it there. Others have approached us to distribute it in Africa. Our second product developed for the bottom of the pyramid market was our water purification product, PUR. This powder turns ten liters of dirty water clear in 15 minutes.
DG: In your Sustainability Report you also mention that one of your goals is to "develop new business models appropriate to lower income developing country markets." Why is this in P&G's interest? Would it not be more profitable to invest in new products for the developed countries?
GC: Absolutely, that is why all the MNCs are concentrated in the North; that is where the wealth is concentrated. But the issue is that there are more and more companies competing for that same piece of the pie at the top, ignoring about four and half billion people on the planet. Certainly today our business is at the top of the pyramid; we make 46 percent of our revenue in North America, 26% in Europe, and the remaining scattered across Asia, Latin America and a small amount in Africa and the Middle East -- so about 20 percent of our revenue comes from the least developed markets.
But if you look forward in the long term, a company can only grow if it continues to adapt and seek out new markets. That includes lower income consumers in general, not only in developing countries. Our developing world markets are growing faster today than any of the other markets, and our CEO has spoken of developing country markets as a huge source of income growth for P&G in the future. The share of developing country revenues will definitely grow over time.
However, these markets require different models of packaging and promoting. Many of the lowest income consumers are illiterate, we don't have access to traditional media means for promotion, etc. -- so there are lots of challenges. It is clear to us that this is not doing business as usual. This is not taking the products and models of how we go to market and try to apply them elsewhere. I believe the business proposition of the BOP is still a hypothesis for business, and once somebody finds the business model that solves the challenges, this could become as big as total quality was in the 1980s in terms of revolutionizing how you think about business.
I have often said scale is the biggest advantage and disadvantage we have as a large multinational company. In the case of developing the water product, our scale allowed us to leverage research labs in different parts of the world to develop a low cost effective product. On the other hand, scale is our biggest obstacle; while it allowed us to launch test markets in four continents simultaneously and do clinical studies in three countries, along with this came developed world overhead costs. My challenge is therefore overcoming the cost disadvantage I have of doing business. Large companies also do not want 1 million dollar businesses; they want 100 million dollar businesses, so the mountain to climb before the investment is worth it is high.
DG: From what I understand you are testing different business models with the water product. Tell me more about these models and how they are working out this far?
GC: There are three separate business models that we have worked on over the past four years. In Pakistan we marketed under a traditional P&G model under the P&G brand. We called this the commercial model. We then adopted what we call the social model, where we really leaped down the pyramid, in Haiti and Uganda. The third model was a disaster relief model.
The model in Pakistan, coordinated with a public campaign on sanitation, is falling a little short of where it needs to be. It shows the hard part; the scale we have to create is so big in order to write off all the overhead and all the P&G costs of going to market.
The social markets model has just launched in Uganda and Haiti, and we are still early there, but we are meeting the success criteria.
The disaster relief model works. The product is stable, storable, it can be shipped at large quantities, stored, and delivered to where it needs to be. We licensed the product to an NGO, Population Services International, and they own the right to distribute it and sell it in those countries. Donor agencies, governments and foundations pay the up-front market development costs, which is the big barrier. Particularly in countries like Haiti, you will never get anyone to invest there on a commercial basis, so that lowers the risk and the amount of product we have to sell; you don't have as much to recoup. This has just been operating for 2-3 months, but it is tracking well in relation to our metrics.
DG: So, the customers in the disaster relief model are the relief agencies?
GC: Yes. These customers are now coming back and want more. And we have committed that we will sell the product at break-even.
DG: From a business perspective, why would you sell at break-even?
GC: We are very sensitive not to be perceived as using public money for helping the profits of big multinationals. We are therefore trying to separate projects that we think are more of a research type of thing. Right now it is not a problem to say that we are not making any money, because the expenses as you start up are huge. We have committed to sell our products at what we believe are our long-term going costs.
DG: Some of our members are policymakers and are interested in attracting foreign investment to their countries. When you look at which developing country markets to invest in, what are the most important factors you consider?
GC: The most important is strong national governance. It is hard for a company like P&G to compete with whatever companies are in the market place today where rule of law is not enforced and corruption is rampant. If you go back to our sustainability report of two years ago, there is an example in there where we in response to a customs official requiring a bribe to let our shipment get through, ended up shutting down our operations for four months. Eventually we always win. We took it all the way to the president of the country, four months later we could start production again, but if that is the norm in a country you cannot expect companies to come and be profitable there.
The issue of strong national governance, enforcement of rule of law, a rule-based economic systems, a free judiciary, absence of bribery and corruption, laws to protect advertising claims (one of the problems we had with our micronutrient product was that competitors were making spurious claims regarding our product that vitamin A does all these things to you, and there was no mechanism to challenge that and consumers were confused -- who am I going to believe?) are all necessary conditions to attract foreign investors.
DG: So if you encounter corruption, you will actually go to the step of shutting down your operation?
GC: Yes, absolutely. It's against the law. In the longer term it will prove to officials in the country that P&G is not going to play by these old rules. The down-side is that your business may never make it to the future -- you just cannot succeed. It is the people in these countries who lose at the end of the day because they do not have access to the same quality of life that you and I take for granted. They never get it because nobody can do business there.
DG: Some of the countries where P&G does business are known for human rights violations. Some claim that corporations such as yours should not invest in these countries because you by virtue of investing there support the practice of these governments. What do you think about this?
GC: MNCs can raise the bar for the domestic firms. If U.S. companies were not across Latin America and Asia, there would not be any driving force to cause domestic companies to change. When P&G enters a country, we enforce all our environmental and worker safety standards across the board, and frankly some our plants in China outperform what you find in the U.S. and Europe sometimes.
DG: So even if the government does not have an environmental law, you enforce your own standards?
GC: In the vast majority of the cases, even the least developed countries have the laws, but they are never enforced. Two things drive us.
One is sovereign law. Because whatever is on the books, is all that can ever be enforced. It is hard to make an argument to the local manager that he ought to implement something more stringent than his competitor, but as long as it is on the books, we follow it. It is the law.
Second, we implement established good practice such as spill protection, prevention of water contamination etc. in very specific cases where we have operation practices. Health and safety worker protection is exactly the same for all our operations around the world to the degree that in some cases, we have spent much more then we had to by local law to protect workers from enzymes, etc. This you could never defend on an economic basis because labor is cheaper. It is a combination of P&G best practice, plus you obey the law, period.
DG: When one reads the discussions about corporate social responsibility, one wonders how far the responsibility of corporations should go. According to Corpwatch, recently farmers and workers who grow coffee beans in regions from South America to Vietnam were faced with the lowest prices in years, prices that did not cover their costs, and farmers were slipping into dire poverty, pulling their children out of school, unable to afford medicine and struggling to eat. According to Corpwatch, their coffee farming practices were also destroying rainforest ecosystems. Are the unsustainable production practices of these farmers your responsibility?
GC: We have 100,000 suppliers around the world. We cannot audit every single supplier, but we expect them to obey the law, pay minimum wage, etc. and we have an internal assessment system for managers in local plants to assess them -- we teach them what to look for. For example, "Do you have suspicions about the age of people working there?" This is very subjective. People look young in some places. Anything they put a check-mark next to will get a follow-up investigation. We do not claim to be perfect with 100,000 suppliers around the world, but whatever we find internally, we will investigate it. A lot of the supply chain issues -- basic human rights and worker rights -- this will solve itself pretty quickly. Ten years from now these will be non-issues. I say that having managed environment for several years; in environment the biggest stumbling block is the big capital expense. Basic rights are not, they are an operating expense, and at a minimum they can be re-negotiated in the next round of negotiation with the supplier.
That being said, our responsibility ends with the suppliers we have a direct relationship with. It is not infinite. The coffee farmers are 2-3 times removed, they sell to coops, that sell to a large broker, so there are several stages in there. However, this subject of the plight of the coffee farmers is a sign of a crisis in the coffee industry; the problem comes from over-supply. Some people in the world are making money off of coffee and are doing very well. The Brazilians are doing just fine. Central Americans happen to be the high cost producers and they are the once being most impacted.
DG: On the price issue; you agreed to pay a higher price for some of your coffee?
GC: Yes, we agreed to 3 executions of our millstone brand. We started out doing internet sales seeing if we could target the very small population that buys fair trade products. In September we began to launch these products in the stores. That being said, those high priced coffees are always going to be a minuscule niche in the market. We do need other ways.
DG: Is it really fair trade if you artificially pay a higher price then what supply and demand dictate? Unless you are a monopoly buyer, that is, and one could say you have a responsibility to set a price floor?
GC: You are right. No, it is not fair trade, and it does not sell either. If the value is not perceived by the consumer, the problem is much bigger then the fair trade concept will ever address. With regard to us being a monopoly buyer; the bulk of the world's coffee is bought by a few buyers, but the real problem is the fact that there is about 20-30% too much coffee in the world. So there is plenty of coffee out there sitting in silos, and as long as there is that discrepancy between supply and demand, monopoly or not, the prices will be low.
DG: Recently a group of your shareholders stated that P&G is not doing enough to protect shareholder value from the impact of the HIV/AIDS pandemic. From their point of view P&G faces financial exposure due to employees, suppliers, distributors and customers exposure to HIV/AIDS. You mention in your Sustainability Report that AIDS has not had a significant impact on the economics of P&Gs global business because none of your major markets are located in areas with high incidences -- as you strive to reach your goals above, will this not become a more important issue for you?
GC: We have not seen any big impact on our supply chains. We have a small presence in Africa, so from an employee perspective it has not been a big problem. However, more and more people are talking to us about the synergies between our water product and HIV/AIDS because of the large amount of water people need to drink when taking their drugs. I don't want to say it is a positive, but if we are able to develop things that will change the quality of people’s lives, it does not have to be a negative to us. And the way we think about sustainable development is better quality of life for everyone now and for generations to come -- "how is it that your business is creating a better life for your consumers and your employees?" is the way we think about sustainability.
DG: The conference we have just attended is titled "Eradicating Poverty through Profit." It seems to be a rather presumptuous title; is it really possible to eradicate poverty through profit?
GC: If you eradicate poverty, it will be because of the market systems that make it in everybody’s self interest. Everything you turn around and see [in the United States] is brought to you by profit-making industry. The quality of life that we get here comes to us through the market place. The markets don’t work in the least developed countries.
I want to emphasis again the issue of governance. Every year, the Wall Street Journal and the Heritage Foundation publish the Economic Freedom Index. It is all about good governance. They plot every country in the world, and there is a perfect curve between governance and economic performance...if governments don’t play their role in creating the foundation of good governance, I don’t think we can create the market solution.
Two other observations from this conference if I may; profit was not a dirty word. And it is in many UN forums and others with campaigning NGOs. They seem to be almost afraid of a relationship with business, and profit is dirty somehow. The other thing that struck me is, if we succeed in bringing the least developed countries out of poverty, and you look back in history, I think you will find that there was a very unique relationship that developed between the private sector, NGOs and national governments that made it all possible. I am not sure how much the UN plays a role in that though...
Back to your question - I think…, yeah, it can. And somebody will break the code. It may not be one of the U.S. multinationals, it may be a large conglomerate in India or something, I hope it is us, but somebody will.
This article has been reprinted courtesy of Development Gateway. For further information, read the Development Gateway Special Report: Foreign Investment and Development -- Who Gains?
Copyright (c) 2005 Development Gateway Foundation, Inc. All rights reserved.
Just about every corporate sustainability pro is tweeting these days. We've done some analysis of who's actually getting their message across. Read more
The sixth annual edition of research has been expanded to include data on 1,600 companies worldwide, as well as on the U.S.-based S&P 500. Find out where the world of sustainable business is headed -- and the leading indicators of future progress.
Read the stories and download the report.
Simran Sethi shares how our psychology and geography shape the ways we engage and share with each other. See our entire video collection