What has happened to a brand you can trust?

In 1982 someone tampered with Tylenol capsules, resealed them after adding cyanide, and put them back on the shelves in pharmacies. The product tampering resulted in the murder of seven people, and many thought that would be the end of Tylenol. What happened instead became a casebook example of how a corporation should react. Although the murders happened in Chicago, Johnson & Johnson reacted quickly to recall the product nationwide and reintroduced Tylenol with tamper-proof packaging. The action cost the company $50 million, but within one year they had recaptured 80% of their pre-scandal market share. Due to recalling the product quickly, and an advertising campaign focused on regaining consumer trust, Tylenol remained one of the best selling pain relievers.

With the recent advent of some of the most severe corporate scandals ever perpetrated, specifically British Petroleum, Goldman Sachs, and Toyota; we are seeing an opposite reaction. All three of these corporations have denied culpability for their wrongdoings in multiple arenas. BP has pointed fingers at Halliburtan and TransOcean for their recent oil rig explosion, (who are pointing fingers back). Goldman Sachs is disavowing to congress their knowledge that housing prices were going to fall when they sold subprime mortgage products, even though they were in fact working at the same time to protect themselves from these very same products. Toyota, still in denial, denied for years that there were automobile acceleration problems.

It is particularly egregious to me that each of these three firms specifically marketed their brands based on trust. BP’s “Beyond Petroleum” green campaign was designed to ensure consumers they were environmentally responsible, consumers pay a higher premium for investing through Goldman Sachs because they believed they were looking out for their interests, and Toyota had a long history of emotionally charged advertising focusing on dependability, safety, and quality.

Whatever has happened to corporate accountability and what effect will this have on consumers trusting a brand in the future? It actually appears that marketing and corporate accountability have come full-circle since the days of the Tylenol recall in 1982. Johnson & Johnson recently recalled 43 different children’s medicines, including Children’s Tylenol, due to product contamination and the FDA has charged that they knew about these issues for over two years and attempted to cover them up.

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Personal Website - David Thibodeau

Personal Website - David Thibodeau

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Recompute: the Cardboard Computer, (new product)

In the 1967 film “The Graduate” Dustin Hoffman’s character, Benjamin Braddock, is given the following words of advice regarding his career aspirations by a well meaning friend of the family, “plastics”… ”there’s a great future in plastics. Think about it. Will you think about it?” The family friend was correct, in 1960 less than 1% of municipal solid waste, (MSW), was plastic, while in 2008 the annual total of plastics in MSW was 12%, about 30 million tons, and this does not include all durable plastic waste products that were discarded, (EPA, 2009).

Plastics are manufactured in basically two different forms; thermoset plastics which are molded irreversibly and are used for their durability and strength and, thermoplastics which are non-durable and are easily recyclable. Although there is a market for recycling plastic, only about 6.8% of the plastics generated in 2008 were recycled, (EPA, 2009). According to the EPA the U.S. manufactured about 11 million tons of durable thermoset plastic materials and about 7 million tons of non-durable thermoplastics in 2008.

One use for these durable plastics is in the manufacture of electronic products. About 2% of the MSW in 2007 was comprised of used or end-of life consumer electronics, (EPA, 2010). In 2009 Brenden Macaluso introduced a computer manufactured in part of post-consumer recycled corrugated cardboard called the ReCompute, with the first of these computers manufactured by Montoroso and available for sale in April, 2010. Cardboard was chosen due to the fact that it is at the extreme end of the life-cycle amortization product sustainability spectrum, (L.A.P.S.), meaning that among the most sustainable of products, additionally it is a recyclable product, and is made out of brown kraft paper which utilizes recycled materials. In addition to cardboard being less energy intensive to produce than thermoset plastics and easier to manufacture, utilizing less manufacturing operations, and the computers are easier to disassemble at the end of their life-cycles. Cardboard is also safer as a material and is much less toxic and much more heat resistant than plastic, having an ignition point at 800⁰ Fahrenheit, while the plastics currently used in the manufacture of computer casings ignite at much lower temperatures, (additionally the cardboard utilized in the manufacture of these computers is treated with a non-toxic flame retardant), (Macaluso & Montoroso, 2010).

The EPA estimates that over 40 million computers became obsolete in 2007, approximately double the figure of a decade ago, and that figure is steadily increasing while recycling of consumer electronics is holding at about 18%, primarily as a result of mandatory state recycling initiatives, (EPA, 2010). As sustainability issues become of increasing importance throughout America and the world, the need to produce more environmentally conscious consumer electronics constructed of more sustainable materials is something that governments and consumers will demand. If The Graduate were made in 2010, one wonders if the family friend would have advised Benjamin Braddock that there is a great future in corrugated cardboard, “Think about it. Will you think about it?”

References:
Macaluso. B., & Motoroso. [2010, February 11]. Recompute: Sustainable Computer FAQ. Retrieved from http://www.sustainable-computer.com/faq/

Nichols, M. (Director), Willingham, C. (Writer), &, Henry, B. (Writer). (1967). The Graduate [Motion Picture]. United States. MGM/UA.

Environmental Protection Agency. (2009, November 23). Plastics. Retrieved from http://www.epa.gov/osw/conserve/materials/plastics.htm

Environmental Protection Agency. (2010, March 1). Statistics on the Management of Used and End-of-Life Electronics. Retrieved from http://www.epa.gov/osw/conserve/materials/ecycling/manage.htm

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Global Brand Challenges

There are numerous examples of companies attempting to sell products in foreign markets without doing their appropriate due diligence concerning language, from Chevrolet selling Novas in Spanish language countries when the words “no va” translates as “doesn’t run”, to Gerber marketing baby food in French speaking countries when the word “gerber” translates as “to vomit”. While language errors represent marketing failures, and can be quite costly to companies, they essentially are little more than humorous anecdotes when compared to some of the truly inept blunders that some major global companies have made when introducing brands into foreign markets. This paper examines the three tenets identified in the article How Global Brands Compete, published in 2004 in the Harvard Business Review, of Quality Signal, Global Myth, and Social Responsibility through examining new product development challenges, technology challenges, and accompanying legal and ethical implications. Starbucks, Toyota, Google, and Proctor & Gamble have all recently witnessed various levels of success or failure through their adherence to these three tenets.

Challenges in New Product Development
Douglas Holt, John Quench, and Earl Taylor discuss in their article How Global Brands Compete, that multinationals have three distinct phenomena that work in their favor when consumers select global brands; 1. Quality Signal, consumers attach an ideal of quality to global brands, 2. Global Myth, consumers look to global brands as cultural ideals, and 3. Social Responsibility, consumers look to global companies for solutions to problems that influence society. Through anecdotal examples we can see how these same phenomena can also work against companies in the global market.

Challenges: example number 1.
Consumers choose global brands, even though they can be substantially more expensive than comparable local brands, because they expect a level a quality that they feel they do not get from local brands. Marketing in a global arena however can backfire when there is a demand for products and consumers are unwilling or unable to pay the premium price. Notably, Starbucks attempted infiltration into markets where coffee is plentiful and less expensive has met with limited success as their profit margins from foreign markets were only 8.1%, compared to 14% from their U.S. stores, even though consumers in these markets may enjoy the product, they are less willing to pay a premium price for it, (Matlack, 2008). Alternatively and more notably is when the consumer expects quality and the company fails to deliver as is the case with the recent recalls of cars made by Toyota due to manufacturing defects. The company now faces multiple class action and individual law suits in the U.S. and Canada as a result of these defects and the company’s reputation with consumers will suffer as a result. Expectations are that perceptions concerning Toyota’s quality will fall by at least 5% with consumers over the next three years as a result of these product defects, and could potentially fall as much as 20%, (Jackson, 2010).

Challenges: example number 2.
Global companies introducing a new product into the global market face a myriad of challenges but no challenge can doom a new product to failure more than a display of cultural insensitivity and the inevitable reactions of consumers. Cultural insensitivity can cause consumers to necessarily choose between the global myth and their own cultural identity. A recent example included the use by Google of culturally insensitive maps to be overlaid on the current satellite street maps of Tokyo, Kyoto, and Osaka used in the product Google Earth, (Lewis, 2009). Google unknowingly tapped into bigotry within Japan against its Burakumin citizens by using older maps. The name Burakumin translates into the words “filthy mob” and the names used to describe their neighborhoods on Google Earth loosely translate into the words “scum town” and the descendents of these citizens still live in these neighborhoods. Through their insensitivity they have reignited a deep rooted prejudice that is still in existence and has existed in the country for nearly four centuries. Blunders such as Google’s continually plague multinational corporations as they attempt to do business abroad as companies struggle to understand cultural sensitivities. Repercussions can be enormous in terms of lost trade opportunities, not only due to consumers reacting negatively, but also foreign governments have intervened in some cases and prohibit these companies from distributing their products.

Challenges: example number 3.
Finally, multinational companies must continually demonstrate a commitment to social responsibility, an onus that local brands do not face, or they must suffer the effects of this criticism. An additional difficulty is that most consumers react to social responsibility initiatives from multinational corporations with skepticism and regard these initiatives as opportunistic. Holt et al describe in their article an initiative by Proctor & Gamble seated in entrepreneurship as an example of a social responsibility initiative that indicated an actual interest in the welfare of people and could be viewed without skepticism, (2004). P&G identified that a billion people use unsafe drinking water daily which leads to 2 million deaths per year. They subsequently identified a process within their scope of expertise to develop a water purification technique that could be easily and inexpensively deployed throughout the world. P&G harnessed their own resources to credibly solve a global sanitation problem.

Technology and New Product Development

Technology is of the utmost importance in all three of the phenomena described by Holt et al. As a Quality Signal consumers look to global brands to develop new products and technologies faster than local rivals, corporations use technology to communicate locally through virtual teams to learn cultural sensitivities to determine the effectiveness of advertising and marketing campaigns for global brands therefore propelling the Global Myth, and finally Social Responsibility initiatives can be developed and implemented through the increased access global companies have to advanced technology and social welfare therefore can be improved.

Technology: example number 1.
Part of the quality problems witnessed recently by Toyota could have easily been avoided if the company had utilized the immeasurable technological resources at their disposal to track and diagnose the problems consumers were experiencing with their automobiles. Toyota initially rejected consumer accounts of their product defects; this ultimately led to the lack a consumer confidence that will be reflected in sales for years to come. Toyota’s investigation of consumer complaints ultimately led to the recall of the defective automobiles, but the company’s delay of appropriate action to remedy problems was due to a failure on management’s part, (Jackson, 2010). Inevitably, Toyota will lose customers in the ensuing years to their chief competitors, including Ford and Honda, due to this delay.

Technology: example number 2.
Google, a technology company, did use technology to correct the cultural insensitivity problems they had with their Google Earth problem in Japan. Responding to customer complaints, the old maps were removed within two weeks of their implementation, thereby mitigating some of the damage that had been done to their reputation, (Lewis, 2009).

Technology: example number 3.
Proctor & Gamble’s Social Responsibility initiative was rooted in the advanced technological expertise in which that company excels. P&G effectively turned a Social Responsibility initiative into an entrepreneurial success through their use of technology demonstrating an undeniable interest in the social welfare of the global community and an extraordinary social impact, (Holt et al, 2004).

Legal and Ethical Implications in New Product Development
A company’s action, or in some cases non action, in the global arena can have dire legal and ethical implications. Consumers rely upon Quality Signals from global brands and products that do not deliver on this implicit promise, that can potentially damage the health and well-being of the global consumer, indicate serious ethical lapses in management and can result in serious litigation against the firm. Additionally, as companies that enter the global market are entrusted with local identities and take on the responsibility of shaping global identities through Global Myth, they have an ethical responsibility to proceed with cultural sensitivity. Finally, as companies enter the global arena they wield extraordinary influence in these markets both positively and negatively; they should be expected to address social problems ethically through Social Responsibility initiatives and should be held legally accountable for any negative consequences resulting from their involvement in these markets.

Legal and ethical implications: example number 1.
Toyota’s lapses were the most egregious ethically and legally. A total of 18 people were killed and 304 were injured as a result of the manufacturing defects. Additionally there are hundreds of class action and individual law suits pending against the companies in addition to government actions. Overall, Toyota is expected to recall over 5 million automobiles due to the defects, (Jackson, 2010).

Legal and ethical implications: example number 2.
Google’s actions, while having no legal ramifications, indicate an ethical lapse in that they maps they used were significantly out of date and were offensive to the community that they were seeking to engage. The maps that they used were not properly vetted and demonstrated a cultural insensitivity. Although they reacted quickly to remove these maps it remains to be seen if any permanent damage is done to Google’s reputation and brand in Japan.

Legal and ethical implications: example number 3.
Proctor and Gamble not only behaved ethically in their Social Responsibility initiative, they did so without any profit motive and they have witnessed some criticism for doing so. The initiative that they introduced was a result of their utilizing their resources to solve a problem that have plagued governments and non-governmental organizations for years. However, as global consumers actually believe that multinationals have a greater responsibility for social welfare and towards solving social problems, then a humanitarian endeavor such as that accomplished by P&G should ultimately be rewarded by global consumers.

Conclusion
Increased participation in global markets is fraught with complications in new product development, technology, and legal and ethical issues. In order for companies to compete successfully in these global markets they must ensure that they sell quality products, engage local consumers in their brand, and participate in social responsibility initiatives. The challenge remains for global brands to demonstrate that they are neither a force for good of for evil but are in fact ethically neutral.

References
Holt, D.B., Quelch, J.A., & Taylor, E.A. (2004, September). How global brands compete. Harvard Business Review, 82(9), 68-75. Retrieved from EBSCOhost Business Source Premier.

Jackson, K. (2010, February 1). Toyota’s crash and burn. Automotive News, 86 (6397), 1-26. Retrieved from EBSCOhost Business Source Premier.

Lewis, L. (2009, May 22). Google follows ghetto maps and ends up in class war. The Times (London), Edition 1, 43. Retrieved from Lexis/Nexis Academic.

Matlack, C. (2008, July 3). Will global growth help Starbucks. BusinessWeek Online, 13. Retrieved from EBSCOhost Business Source Premier.

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Formal Research vs. Business Proposal

In his 2007 article, Jeffrey Pfeffer identified a “preoccupation with theory and an interest in novelty”, (p. 1338), as a significant problem plaguing formal research in business schools. Describing this phenomenon as a “quest for ‘what’s new’ rather than ‘what’s true’, (p. 1339), Pfeffer argues, that competition in business schools has produced uniformity and stifled innovation. Pfeffer notes that rather than build upon the evidence-based knowledge that has furthered other disciplines, the pressure to publish in ranked journals has forced researchers to disdain work that informs professionals. Researchers prefer to concentrate on idiosyncrasies of previously published theoretical work that has little effect on real underlying processes in the business world noting that “superficial aspects are imitated that have little effect on underlying processes”, (p. 1341). Additionally while research in academia focuses on what works, it neglects what doesn’t work, when knowing what doesn’t work can be as important as knowing what does, (p. 1338).

Buckley, Ferris, Bernardin, and Harvey, (1988, p.36), identified the same problem when they stated that teaching in business schools has become more theoretical and less applied. Buckley et al. also stated that “HRM practitioners are relatively familiar with research performed in this area, but they fail to see many practical applications in it”, (p. 32), when analyzing the results of a survey they gave to 113 human
Both articles postulate that corporations and universities need to become more adept at forming partnerships so that the research generated at business schools focuses more on real world applications and is therefore directed to a broader audience. Buckley et al., (1988, p. 31), explicitly stated that there is a “lack of follow through in developing business-university partner relationships”, while Pfeffer states that management has failed to follow evidence based practice resulting from academic professional practice relationships that exist in other disciplines noting, “the closer connection with professional practice – not from occasional lecture or executive program but from coproduction of teaching and research and more regular interactions – are features that I see, at least to a somewhat greater extent, in engineering, medicine, and education.” (p. 1342).

According to Bezerman & Moore, (2009), “researchers have found that people rely on a number or simplifying strategies, or rules of thumb, when making decisions”, (p. 6). Managers in business situations rely upon heuristics as well when adopting solutions. In the real world, a business proposal must be viewed, above all things, as feasible. An idea that hasn’t been successfully implemented previously in another setting has little chance for serious
consideration by a firm. Generally corporations seek to implement strategies that correct observed problems or strategies that gain a competitive advantage. These strategies can be surveyed internally, documented, and then presented in a business proposal. They inevitably choose practical real-world applications that have been tried by other firms and have been proven successful for implementation. More often than not these applications do not come from research by academic researchers as their works appear to be predominantly directed towards a scholarly audience. Although they may be influenced by academic research, real-world solutions are more likely to come from books and journals marketed towards business managers. These books and journals may actually even be written by the same academicians engaging in formal research who are merely directing their research towards a difference audience.

References:

Bazerman, M. H., & Moore, D. A. (2009). Judgment in Managerial Decision Making (7th ed.). Hoboken, NJ: Wiley and Sons.

Buckley, M.R., Ferris, G.R., Bernadin, J. & Harvey, M.G. (1998). The disconnect between the science and practice of management. Business Horizons, 41(2), 31-38. Retrieved from Business Source Premier database.

Pfeffer, Jeffrey (2007). A modest proposal: how we might change the process and product of managerial research. Academy of Management Review, 50(6), 1334-1345. Retrieved from Business Source Premier database.

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FOREX

Converting €1 million at an exchange rate of €.70 to $1.00 would mean that you had $1,430,000.00:
If 1.0 dollars = .70 euros, then 1 euro= 1.43 dollars:
1 ÷ .70 = 1.42857 or 1.43 $/€
€ 1million * 1.43 $/€ = $1,430,000.00
If you left the €1 million in an Irish bank for one year at 2% you would make €20,000.00:
€1 million * .02 = € 20,000.00, so you would have €1,020,000.00
If you put the $1,430,000.00 in a U.S. bank at 4% you would make $57,200.00:
$1,430,000.00 * .04 = $57,200.00, so you would have $1,487,000.00
If in one year you took the €1,020,000.00 and cashed it in at a rate of €.65 to $1.00 you would have $1,570,800.00. If 1.0 dollars = .65 euros, then 1 euro= 1.54 dollars:
1 ÷ .65 = 1.53846 or 1.54 $/€
€1,020,000.00 * .1.54 $/€ = $1,570,800.00

Due to the foreign exchange rate you would have been better off leaving the money in euros even though the interest rate was half that of the U.S. interest rate.

Going backwards, if you have 1.43 $/€ then you have .70 €/$, and if you have 1.54 $/€ you have .65 €/$, you have you therefore have more dollars per euro at this exchange rate. You are only receiving 65 euros for every American dollar, as opposed to one year ago when you were receiving 70 euros for every American dollar. According to the theory of purchasing power parity, this would mean that the inflation rate was 7.69% higher in the U.S. than in Europe over this period of time and you would be better off leaving your money in euros:
Inflation rate = 100 * (.70 – .65)/.65 = 7.69%

Banks, corporations, and individuals use covered interest arbitrage as a hedging technique to protect themselves against the fluctuations in the foreign currency exchange market. An investor buys a financial instrument in a specified foreign currency and then at the same time buys a forward foreign exchange contract to convert this currency to another currency. The forward exchange contract would be due at the time of the maturity of the financial instrument and would allow him to convert the principle and interest back to a specified denomination. If at the time of maturity the foreign exchange market isn’t conducive to exchanging the currency, then the investor can choose not to exercise the forward exchange option and can allow the funds to remain in the foreign currency. This allows individuals to repatriate investment currency to their native economies when the exchange rates are optimal. Interestingly, 2009 was the final phase out year for repatriation of dividends under the American Jobs Creation Tax Act of 2004 at a preferred tax rate of 6% of their qualified production activities income; (it had previously been at 3% for the tax years 2005 and 2006), the subsequent repatriation tax rate for dividends from 2010 onward is 9%, (BNA, 2010). This left corporations in the difficult position last year of deciding either to repatriate foreign dividends when the dollar was strong against foreign currency in virtually every market, causing them to lose in the foreign exchange market in order to gain a preferred tax rate, or to leave these investments in foreign currencies with the prospect of obtaining a better foreign exchange rate, and to face a more extreme repatriation tax rate in the future.

Absolute purchasing power parity, (PPP), or the law of one price, is the idea that the pricing for a specific good or service should be the same in every country at the same given time, (Appleyard, Field, & Cobb, p.485). Absolute PPP disregards tariffs and other trade restrictions, transportation costs, and the fact that good and services are not comparable from one country to another, therefore economists often use a scaled down version called relative purchasing power parity that accounts for these discrepancies. As seen in the example above regarding the euro exchange, purchasing power parity is used to compare inflation rates across different countries by comparing the changes in their currencies values to one another.

References:

Appleyard, D., Field, A., & Cobb, S. (2010). International economics (7th ed.). New York: McGraw-Hill Irwin.

BNA Tax Management Inc. (2010). Summary of H.R. 4520, American Jobs Creation Act of 2004. Tax Management Summary online. Retrieved from www.bna.com/tm/eti_tm_summary.htm.

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Coca-Cola Company

The Coca Cola Company, (NYSE: KO), based in Atlanta, GA, is the world’s largest multinational beverage company, with over 90,000 employees worldwide. Coca-Cola is the foremost producer of nonalcoholic beverage syrups and concentrates and has sales in over 200 countries. Additionally they own non-controlling interests in dedicated bottling companies and distributors worldwide, such as Coca-Cola Enterprises, which purchase solely Coca-Cola syrups and concentrates, and account for a significant portion of their revenues. Due to their wide global operations, Coca-Cola currently trades in over 70 functional currencies, with weaknesses in some currency markets offsetting strengths in others to effectively hedge to some degree against overall loss of revenue. Generally, currency exchange poses both opportunities and risks for the Coca-Cola Company, with their exposure in multiple markets offering a great deal of protection against naturally occurring fluctuations in currency in normal market conditions.

Coca-Cola earns revenues, pays assets, incurs debts, and owns capital operations in these different currencies, with 74% of their net operating revenues arising from operations outside of the United States, (Coca-Cola, 2009). Coca-Cola revenue is therefore heavily dependent upon foreign exchange markets with the exchange value of the U.S. dollar affecting their overall net operating profits, though they consolidate most of their foreign currency exposures which allows them to net certain currency risks and take advantage of natural offsets between currencies. Even so, in 2009 their net operating revenues were down 5% predominantly due to currency fluctuations. The strength of the U.S. dollar against the Euro, the British Pound, the Mexican Real, the Australian Dollar, the South African Rand, and the Brazilian Real negatively affected Coca-Cola’s 2009 earnings in Europe, Eurasia, Latin America, and in Africa, with the only substantial gain in their net operating revenues witnessed in their North American market, (in the Pacific the weakness of the dollar against the Japanese Yen and their hedging activities somewhat mitigated their foreign exchange exposure and some gain was realized), (Coca-Cola Company, 2009).

The euro was strongest against the U.S. dollar in February of 2009 with an average of € .78 to $1.00, the euro engaged in a gradual decline in the intervening months ending with November 2009 being the weakest month at € .67 to $1.00, and showed only a relatively minor increase in December at € .68 to $1.00, (OANDA). As the dollar increased in value last year, the rest of the world basically followed the same model with the few exceptions. As such, not only were Coca-Cola’s European revenues were severely affected as the dollar value of net operating revenues that were denominated originally as Euros decreased, but so were their net operating revenues decreased in most other foreign markets. As there profits are particularly dependent upon their chief bottler and distributor, Coca-Cola Enterprises, CCE, which operates globally and experienced the same foreign exchange scenarios, their net operating profits were affected by CCE’s decreases as well. As a result, The Coca Cola Company’s 2009 net operating revenues were $30,990 million, while their 2008 net operating revenues were $31,944 million, indicating a decrease of $1,004 million, or roughly 5%, (Coca-Cola Company, 2009). In the first four months of 2010 the euro is rallying against the dollar, though it still has not reached the February 2009 exchange rate, it has climbed from an average of € .70 to $1.00 in January to its current average for April of € .74 to $1.00. This continued appreciation of the euro against the U.S. dollar would be beneficial for Coca-Cola in 2010 in the European market as we would witness the reverse phenomena; the value of Coca-Cola’s profits in euros would increase. If in fact this phenomenon holds for the rest of the global economy then Coca-Cola should see substantial increases in net operating revenues from their global operations in 2010.
The company regularly enters into forward exchange and currency options to some degree, principally against the Japanese Yen, and the Euro, to hedge against currency fluctuations and these transactions mitigated their currency exchange losses to some extent. However, considering the strength of the U.S. dollars performance in virtually every global market, these forward exchanges, currency options, and other hedging practices were not adequate to protect their net income and earnings per share in 2009.









References:

Average Exchange Rates. (n.d.). OANDA Corporation. Retrieved from http://www.oanda.com/currency/average

Coca-Cola Company. (2009). 10-K Annual Report 2009. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml

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