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ETHICS AND SOCIAL RESPONSIBILITY IN MARKETING CHAPTER CONTENTS PAGE MATERIALS AVAILABLE FOR LECTURE AND DISCUSSION .................................. 4-2 STUDENT LEARNING OBJECTIVES ................................................................................ 4-3 KEY TERMS AND CONCEPTS ........................................................................................... 4-3 LECTURE NOTES There is More to Anheuser-Busch Than Meets the Palate ............................................ 4-4 Nature and Significance of Marketing Ethics ................................................................ 4-4 Understanding Ethical Marketing Behavior .................................................................. 4-5 Understanding Social Responsibility in Marketing ....................................................... 4-9 ANSWERS TO “APPLYING MARKETING CONCEPTS AND PERSPECTIVES” .... 4-13 ANSWERS TO “INTERNET EXERCISE”......................................................................... 4-14 SUPPLEMENTAL LECTURE NOTE (SLN) SLN 4-1: The Five Most Common Kinds of Industrial Espionage .............................. 4-15 IN-CLASS ACTIVITY (ICA) ICA 4-1: Sustainable Development .............................................................................. 4-16 VIDEO CASE 4 TEACHING NOTE (TN) Energy Performance Systems, Inc.: Cheap, Green Electricity ..................................... 4-20 POWERPOINT THUMBNAILS .......................................................................................... 4-27 4-1 Chapter 4 MATERIALS AVAILABLE FOR LECTURE AND DISCUSSION PowerPoint Slides1 Transparencies2 Handouts3 Textbook Figures Figure 4-1 A framework for understanding ethical behavior .... Figure 4-2 Three concepts of social responsibility .................... Supplemental Figures and Advertisements Figure 4-A Anheuser-Busch ad promoting responsible drinking ................................................ Figure 4-B Drinking among high school seniors ....................... Figure 4-C International comparison of the percentage of software in use that is pirated.................................. Figure 4-D Consumer Bill of Rights .......................................... Figure 4-E Personal moral philosophies .................................... Figure 4-F Elements of a social audit ........................................ In-Class Activity (ICA) Figure ICA 4-1, Figure 1 Sustainable Development............................... Teaching Note (TN) Figures TN 4, Figure 1 TN 4, Figure 2 1 2 3 Benefits and Costs of Groups Affected by a Whole Tree Energy Plant ........................... Segments to Reach and Messages and Media to Use in Marketing the Whole Tree Energy Technology ................... “PowerPoint Slides” are available on a CD-ROM and appear as “PowerPoint Thumbnails” within this chapter of the Instructor’s Manual. 100 “Transparencies” are available to textbook adopters by request of their local McGraw-Hill/Irwin sales representative. Instructors may choose to reproduce some figures and hand them out to each student in the class to enhance discussion. These “Handouts” are shown with a check in the right column. Chapter 4 4-2 STUDENT LEARNING OBJECTIVES After reading this chapter students should be able to: Appreciate the nature and significance of ethics in marketing. Understand the differences between legal and ethical behavior in marketing. Identify factors that influence ethical and unethical marketing decisions. Distinguish among the different concepts of ethics and social responsibility. KEY TERMS AND CONCEPTS cause-related marketing moral idealism code of ethics social audit Consumer Bill of Rights social responsibility ethics utilitarianism green marketing whisle-blowers laws 4-3 Chapter 4 LECTURE NOTES Chapter Opening Photo CHAPTER OPENING EXAMPLE There is More to Anheuser-Busch Than Meets the Palate Slide 4-7 Figure 4-A Responsible drinking ad Slide 4-8, T Figure 4-B High school drinking ad Anheuser-Busch spends millions of dollars each year trying to convince people not to abuse its products and millions more to decrease litter and solid waste. Why? Anheuser-Busch acts on what it views as an ethical obligation to its customers with its “We All Make a Difference” advertising campaign. This effort reinforces the good practices of drinkers who exercise personal responsibility, designate a driver, or call a taxi, and salutes parents who talk with their children about illegal underage drinking. In addition to its successful alcohol awareness and education initiatives, Anheuser-Busch is an advocate and sponsor of efforts to preserve the natural environment. For example, it is the world’s largest recycler of aluminum cans—recycling the equivalent of 120% of the beer cans it ships domestically. Slide 4-9 I. NATURE AND SIGNIFICANCE OF MARKETING ETHICS Ethics are the moral principles and values that govern the actions and decisions of an individual or group. They serve as guidelines on how to act rightly and justly when faced with moral dilemmas. A. Ethical/Legal Framework in Marketing Ethics deal with personal moral principles and values. Laws are society’s values and standards that are enforceable in the courts. There are numerous situations where judgment plays a large role in defining ethical and legal boundaries. Often, actions that are technically legal could be viewed as unethical, and sometimes actions considered to be ethical may not be seen as legal. B. Current Perceptions of Ethical Behavior 1. There has been a public outcry about the unethical practices of businesspeople. Public opinion polls show: Chapter 4 58% of U.S. adults rate ethical standards of business executives as “fair” or “poor.” 4-4 90% think white-collar crime is “very common” or “somewhat common.” 76% say the lack of ethics in businesspeople contributes to tumbling societal moral standards. 41% of 1,694 corporate employees in a recent survey stated that they were aware of ethical problems in their companies. 2. There are at least three possible reasons the state of perceived business ethical conduct is at its present level: Increased pressure on businesspeople to make decisions in a society characterized by diverse value systems. Growing tendency for business decisions to be judged publicly by groups with different values and interests. Ethical business conduct may have declined. CONCEPT CHECK 1. What are ethics? Answer: Ethics are the moral principles and values that govern the actions and decisions of an individual or group. They serve as guidelines on how to act rightly and justly when faced with moral dilemmas. 2. What are three possible reasons for the present state of ethical conduct in the United States? Answer: These reasons are: (1) increased pressure on businesspeople to make decisions in a society characterized by diverse value systems; (2) growing tendency for business decisions to be judged publicly by groups with different values and interests and; (3) ethical business conduct may have declined. Figure 4-1 Ethical framework Slide 4-13, T II. UNDERSTANDING ETHICAL BEHAVIOR Researchers have identified numerous factors that influence ethical marketing behavior. Their relationships can be shown in a framework in which societal culture and norms→business culture and industry practices→corporate culture and expectations→personal moral philosophy and ethical behavior. A. Societal Culture and Norms 1. Culture refers to the set of values, ideas, and attitudes that are learned and shared among members of a group. 4-5 Chapter 4 Culture serves as a socializing force that determines what is considered by the group to be morally right and just. This means that moral standards can be different in different cultures, which can in turn create moral dilemmas. 2. Societal values also affect ethical and legal relationships among individuals, groups, and the organizations they create, including business practices. Software piracy In the U.S., the unauthorized use of another’s intellectual property (ideas, copyright, trademark, or patent) is deemed both unethical and illegal. In other countries, copyright infringement is culturally acceptable. The advent of the Internet has increased the piracy or copyright infringement of software. MARKETING NEWSNET What does it mean? Global Software Piracy Slide 4-15 Figure 4-C Software piracy comparisons Slide 4-16 By 2005 the Internet will link an estimated 1.17 billion Internet users worldwide, making business software piracy easy because pirated copies of software can be distributed and downloaded quickly and globally. An estimated one in every three business software applications in use in the world is pirated. Piracy means lost jobs, wages, tax revenues, and a potential barrier to success for software start-up companies around the globe. Owing to differences in cultures, unauthorized copying is more common in some countries than in others: For example, 70% of software in eastern Europe is pirated, compared with rates of 60% in the Middle East, 59% in Africa and Latin America, 98% in Vietnam, 91% in China, 89% in Russia, 88% in Lebanon and Oman, 41% in Canada, and 25% in the U.S. Unauthorized copying of business software costs U.S. producers about $12 billion in worldwide sales annually. B. Business Culture and Practices Chapter 4 Business culture consists of “the effective rules of the game, the boundaries between competitive and unethical behavior, [and] the codes of conduct in business dealings.” Business culture affects ethical conduct both in the exchange relationship between sellers and buyers and in the competitive behavior among sellers. 4-6 1. Ethics of Exchange. Ethical exchanges between buyer and seller should result in both parties being better off after a transaction. Before the 1960s, the legal concept of caveat emptor—let the buyer beware—was a part of American business culture. In 1962, President John F. Kennedy outlined a Consumer Bill of Rights that codified the ethics of exchange between buyers and sellers. These were the right to: Figure 4-D Consumer Bill of Rights – safety, in the form of industry and federal safety standards for products sold in the U.S. The U.S. Consumer Product Safety Commission routinely checks the safety of 15,000 consumer products. – be informed, which means that marketers: Slide 4-18 FTC How does it protect consumers? Slide 4-19 • have a responsibility to give consumers complete and accurate information about products and services. The Federal Trade Commission (FTC) oversees the claims made by advertising agencies. • should restrict the solicitation and protect the disclosure of consumers’ personal information. – choose, which means that the practice of many supermarkets to demand “slotting fees,” cash payments or free goods to stock new products and therefore limiting the number of new products available to consumers, should be balanced against freedom of choice. – be heard, which means that consumers should have access to public policy makers to make complaints about products and services that can lead to legislation, such as the proposed Patient’s Bill of Rights or the Telephone Consumer Protection Act (1991). 2. Ethics of Competition. Two kinds of unethical competitive behavior are most common: (1) economic espionage and (2) bribery. SLN 4-1: The Five Most Common Kinds of Industrial Espionage Economic espionage involves the collection of trade secrets or proprietary information from a company’s competitors. – The practice is both illegal and unethical and carries serious criminal penalties. – Includes trespassing, theft, fraud, misrepresentation, search competitors’ trash, etc. 4-7 Chapter 4 Offering or accepting a bribe or kickback is considered unethical behavior in American business culture. – Bribe: when money is paid before an exchange occurs. Most common in industries experiencing intense competition or in countries in the earlier stages of economic development. – Kickback: when money is paid after an exchange occurs. – Both are often disguised as gifts, consultant fees, and favors. – Both are common in business-to-business and government exchanges, not business-to-consumer ones. C. Corporate Culture and Expectations Corporate culture reflects the shared values, beliefs, and purposes of employees that affect individual and group behavior. Corporate ethical culture manifests itself in codes of ethics and the ethical actions of top management and co-workers. 1. The Codes of Ethics. A code of ethics is a formal statement of ethical principles and rules of conduct. It is estimated that 80 percent of U.S. companies have an ethics code and one of every five large companies has corporate ethics officers. The lack of specificity is one of the major reasons for the violation of ethics codes. The American Marketing Association has provided a detailed code of ethics at www.marketingpower.com. 2. Ethical Behavior of Top Management and Co-Workers. Workers sometimes violate ethics codes because of how they perceive the behavior of top management and co-workers. Ethical dilemmas often bring personal and professional conflict. For this reason, 35 states have laws protecting whistle-blowers, employees who report unethical or illegal actions of their employers. C. Personal Moral Philosophy and Ethical Behavior Ultimately, ethical choices are based on the personal moral philosophy of the decision maker. Moral philosophy is: Chapter 4 4-8 Figure 4-E Personal moral philosophies Slide 4-23 Learned through the process of socialization with friends, family, and by formal education. Influenced by the societal, business, and corporate culture. 1. Moral Idealism. Moral idealism is a moral philosophy that considers certain individual rights or duties as universal, regardless of the outcome. This philosophy exists in the Consumer Bill of Rights. 2. Ultilitarianism. Utilitarianism is a moral philosophy that focuses on “the greatest good for the greatest number,” by assessing the costs and benefits of the consequences of ethical behavior. This philosophy underlies these economic tenets of capitalism. CONCEPT CHECK 1. What rights are included in the Consumer Bill of Rights? Answer: The rights to safety, to be informed, to choose, and to be heard. 2. What is meant by moral idealism? Answer: It is a moral philosophy that considers certain individual rights or duties as universal, regardless of outcome. III. UNDERSTANDING SOCIAL RESPONSIBILITY IN MARKETING Social responsibility means that organizations are part of a larger society and are accountable to that society for their actions. Figure 4-2 3 concepts of social responsibility A. Three Concepts of Social Responsibility The societal marketing concept stresses the marketing’s social responsibility in the following areas: 1. Profit Responsibility. Slide 4-27, T Profit responsibility holds that companies have a simple duty—to maximize profits for their owners or stockholders. Profiteering occurs when a company makes excessive profits, usually by taking advantage of a shortage of supply to charge extremely high prices. 4-9 Chapter 4 2. Stakeholder Responsibility. Stakeholder responsibility focuses on the obligations an organization has to those who can affect achievement of its objectives. These constituencies include customers, employees, suppliers, and distributors. 3. Societal Responsibility. Societal responsibility refers to obligations that organizations have to the (1) preservation of the ecological environment and (2) general public. Companies have responded to this concern with two marketing practices that reflect socially responsible behavior: MNN AMEX CRM Green marketing consists of marketing efforts to produce, promote, and reclaim environmentally sensitive products. Cause-related marketing occurs when the charitable contributions of a firm are tied directly to the customer revenues produced through the promotion of one of its products. MARKETING NEWSNET Will Consumers Switch Brands for a Cause? Yes, If… Slide 4-29 American Express pioneered cause-related marketing when it sponsored the renovation of the Statue of Liberty. This effort raised $1.7 million for the renovation, increased card usage among cardholders, and attracted new cardholders. By 2005, cause-related marketing could raise over $8 billion. Cause-related marketing benefits companies as well as causes. Research indicates that 82% of U.S. consumers say they have a more favorable opinion of companies that support causes, and 67% say they will switch to a brand or retailer that supports a good cause if the price and quality are equal. Figure 4-F Elements of a social audit B. The Social Audit: Doing Well by Doing Good Converting socially responsible ideas into actions involves careful planning and monitoring of programs. Slide 4-31 Chapter 4 1. Many companies develop, implement, and evaluate their social responsibility efforts by means of a social audit, which is a systematic assessment of a firm’s objectives, strategies, and performance in terms of social responsibility. It consists of five steps: 4-10 McDonald’s ad Recognition of a firm’s social expectations and the rationale for engaging in social responsibility endeavors. Identification of social responsibility causes or programs consistent with the company's mission. Determination of organizational objectives and priorities for programs and activities it will undertake. Specification of the type and amount of resources necessary to achieve social responsibility objectives. Evaluation of social responsibility programs and activities undertaken and assessment of future involvement. Integrating mkt & social resp.? Slide 4-32 ICA 4-1: Sustainable Development 2. Sustainable development involves conducting business in a way that protects the natural environment while making economic progress. Green marketing is an example of one such ecologically responsible initiative. Other initiatives have focused on working conditions and quality-of-life issues at offshore manufacturing sites that produce goods for U.S. companies. Companies that show societal responsibility have been rewarded for their efforts by benefiting from favorable wordof-mouth among consumers and typically outperforming less responsible companies on financial performance. C. Turning the Table: Consumer Ethics and Social Responsibility CTIA ad Consumer responsibly Consumers also have an obligation to act ethically and responsibly in the exchange process and in the use of products. 1. Some consumers engage in unethical practices regarding warranty claims, coupon redemption, credit card applications, returning merchandise, recording copyrighted music, etc. Slide 4-33 2. Determination of organizational objectives and priorities for While consumers are sensitive to ecological issues, research shows that consumers: May be unwilling to sacrifice convenience and pay potentially higher prices to protect the environment, and Lack the knowledge to make informed decisions dealing with the purchase and use of products. 4-11 Chapter 4 CONCEPT CHECK 1. Marketing efforts to produce, promote, and reclaim environmentally sensitive products are called . Answer: green marketing 2. What is a social audit? Answer: A social audit is a systematic assessment of a firm’s objectives, strategies, and performance in the domain of social responsibility. Chapter 4 4-12 ANSWERS TO “APPLYING MARKETING CONCEPTS AND PERSPECTIVES” 1. What concepts of moral philosophy and social responsibility are applicable to the practices of Anheuser-Busch described in the introduction to this chapter? Why? Answer: Anheuser-Busch would seem to be applying a utilitarian ethical philosophy because it has apparently weighed the benefits of this program (incidence of drinking/drunk-driving mishaps) against its costs (decrease in sales revenues). The company has applied the societal responsibility concept of social responsibility, given its focus on the general public. 2. Compare and contrast moral idealism and utilitarianism as alternative personal moral philosophies. Answer: Moral idealism considers individual rights or duties as universal regardless of the outcome. Utilitarianism focuses on the “greatest good for the greatest number” by assessing the costs and benefits of the consequences of ethical behavior. It is important to note that moral idealism does not consider costs, benefits, or consequences, as does utilitarianism. However, utilitarianism does not consider rights or duties outside the context of ethical behavior. 3. How would you evaluate Milton Friedman’s view of the social responsibility of a firm? Answer: Friedman is a proponent of the profit responsibility concept of social responsibility. As such, he believes that a firm’s simple duty is to maximize profits for its owners or stockholders so long as it engages in open and free competition without deception or fraud. This view is narrow because it focuses solely on the firm and not the other constituencies of the firm. On the other hand, the ethical stance reflected in the avoidance of deception or fraud does illustrate a broader view of the firm’s relationship with its constituencies. 4. Cause-related marketing programs have become popular. Describe two such programs that you are familiar with. Answer: Students are likely to provide a variety of answers to this question, many of which are local or regional in nature. The most visible national cause-related programs are associated with the Olympics. 4-13 Chapter 4 ANSWERS TO “INTERNET EXERCISE” Transparency International Slide 4-37 Bribery as a means to win and retain business varies widely by country. Transparency International, based in Germany, periodically polls employees of multinational firms and institutions, and political analysts and ranks countries on the basis of their perceived level of bribery to win or retain business. To obtain the most recent ranking, visit the Transparency International website at www.transparency.org. [NOTE: The link has changed to: Click on the “Knowledge Centre” link and then the “Survey” link. Finally, scroll down to the latest Corruption Perceptions Index (CPI) press release and click on the link to read the report.] Scroll the Corruption Perceptions Index to see where the United States stands in the worldwide rankings as well as its neighbors, Canada and Mexico. Any surprises? Which country listed in the most recent ranking has the highest ranking and which has the lowest ranking? Answers: 1. For the 2002 CP, the latest available, the United States is ranked #16 on the index, while Canada is ranked #7 and Mexico is ranked #57. If the students are surprised at the results, the instructor might inquire why. This should lead to a discussion of the students’ perceptions of the values and ethics of each country. 2. Of the 102 counties ranked in the 2002 CPI, the highest ranked country is Finland while the lowest is Bangladesh. Instructors should note that because this site is updated frequently, the page may be inaccessible on occasion. Chapter 4 4-14 SLN 4-1: SUPPLEMENTAL LECTURE NOTE The Five Most Common Kinds of Economic Espionage Economic espionage is the clandestine collection of trade secrets or proprietary information about a company's competitors. The five most common kinds of economic espionage and measures that firms use to contain them are described below: Kind of Espionage Description Security Measures 1. Dumpster diving Economic spies pick through corporate garbage to find valuable information. If an item is proprietary or sensitive, shred or burn it before discarding it. 2. Elicitation Business and scientific seminars, international trade shows, and unsolicited telephone calls all present opportunities for eliciting sensitive company information. Since company personnel may not know whom they are talking to, they are instructed to be careful about divulging information. 3. Electronic interception Economic snooping conducted via telecommunications or computer intrusions using hardware available at any electronics vendor. Hire an electronics security consultant to identify possible sources of intrusions. Transmit data by mail, the safest route. 4. Traditional theft Breaking into a company facility to copy corporate files or stealing an executive’s luggage or laptop computer. Install burglary systems at company facilities; executive should hand carry sensitive information. 5. Insider treason Economic spying conducted by company employees. Employees should be alert to suspicious behavior. Source: Barry R. Shapiro, “Economic Espionage,” Marketing Management (Spring 1998), pp. 56–58; “The Lure of the Steal,” U.S. News & World Report (March 4, 1996), pp. 45–48. 4-15 Chapter 4 ICA 4-1: IN-CLASS ACTIVITY Sustainable Development Learning Objective. To have students learn how companies proactively balance shareholder value though environmental stewardship and corporate social responsibility in the markets they serve. Definitions. The following marketing terms are referred to in this in-class activity (ICA): Social Responsibility: The idea that organizations are a part of a larger society and are accountable to that society for their actions. Sustainable Development: Conducting business in a way that protects the natural environment while making economic progress. Nature of the Activity. To have students identify and analyze how Dow Chemical Company and Cargill, large, multi-national corporations, implement their commitment to sustainable development. Estimated Class Time. 25 minutes, which consists of: 10 minutes to explain the nature of this ICA and distribute the World Business Council for Sustainable Development Handout to student teams. 15 minutes to present summaries by student teams during the subsequent class period. [NOTE: Students will spend 30 minutes outside class to complete their assignment.] Material Needed. Copies of ICA 4-1, Figure 1: World Business Council for Sustainable Development Handout” for each student. Preparation Before Class. Follow the steps below: 1. Read the material in Chapter 4 on environmental quality, social responsibility, and sustainable development. 2. Familiarize yourself with the World Business Council for Sustainable Development website, which is www.wbcsd.ch. Chapter 4 4-16 Instructions. Follow the steps below to conduct this ICA: 1. Give students this background mini-lecture: “According to the Dow Chemical Company, “We strongly believe that if we are to be successful in the 21st Century, we must simultaneously excel in all three elements of the Triple Bottom Line of sustainable development: economic prosperity, corporate social responsibility and environmental stewardship.”1 It is a member of the World Business Council for Sustainable Development (WBCSD), which consists of a coalition of 165 international companies from over 30 countries that are committed to the three tenets of sustainable development: economic growth, ecological balance, and social progress. The WBCSD believes that there are significant opportunities for companies to use sustainable development practices to both manufacture and market profitable products and services in and to developing countries because such practices can reward firms with both growth opportunities and cost savings. The WBCSD has identified seven keys to implementing sustainable business practices:2 a. Innovate. Technological and social innovation can do much to improve people’s quality of life and tackle the depletion of resources and pollution. b. Practice eco-efficiency. This means creating more value with less impact. It can open up significant business opportunities and help economies grow. c. Move from stakeholder dialogues to partnerships for progress. This consists of alliances between business, government, and civil society to offer new solutions to common concerns. d. Provide and inform consumer choice. Individuals will change their consumption practices when they realize that they can gain financial benefits and better quality of life from sustainable behavior. e. Improve market framework conditions. Sustainability is hindered by monopolies, corruption, perverse subsidies, and prices that do not reflect real economic, social, and environmental costs. Legislation and regulations should promote competition, intellectual and physical property rights, reliable contractual terms, fair and transparent accounting standards, freedom and democracy, and full-cost pricing of goods and services. f. Establish the worth of the Earth. The market system needs to reflect the true environmental and social costs of goods and services. Proper valuation will help maintain the diversity of ecosystems, conserve natural resources, and prevent the build-up of toxic substances in the environment. g. Make the market work for everyone. Poverty and protectionism are the largest barriers to achieving sustainability through the market. Protectionism makes it harder for firms to seize profitable business opportunities and therefore increase consumer purchasing power.” 1 Sustainable Development and Dow. See htto://www.dow.com/susdev/sd_dow/index.htm. 2 Sustainability Through the Market. See http://www.wbcsd.ch/ DocRoot/ihlC8nJnH2pOLpa23tNc/stm.pdf. 4-17 Chapter 4 2. Assign students into teams. 3. Give copies of the World Business Council for Sustainable Development handout to each student. 4. Have the student teams go to the World Business Council for Sustainable Development (WBCSD) website, which is www.wbcsd.ch. Assign students the following tasks: a. Click on the “Case studies” link, which showcases some of the best global business practices for sustainable development. b. Click on the “Sort by: company or country” link to select one case study on sustainable development. c. ASSIGNMENT: Have student teams write a ½-page brief that summarizes the sustainable business practice implemented by the firm analyzed and the benefits to economic growth, ecological balance, and social progress plus a ½-page commentary on the benefits of sustainable development to an organization’s marketing strategy. d. Hand in their summaries during the subsequent class period. 5. At the beginning of the next class period, select one student from 2 to 3 student teams to give a brief report on the sustainable business practices they wrote about. Marketing Lesson. Many firms view sustainable development as an opportunity, not a threat. As these case studies show, organizations that invest in such practices can have a positive effect on economic growth, ecological balance, and social progress as well as their bottom line. Website. The World Business Council for Sustainable Development website is www.wbcsd.ch. Chapter 4 4-18 ICA 4-1, FIGURE 1 World Business Council For Sustainable Development Handout Go to the World Business Council for Sustainable Development website (www.wbcsd.ch) and perform the following tasks… 1. Click on the “Case studies” link, which showcases some of the best global business practices for sustainable development. 2. Click on the “Sort by: company or country” links to select one case study on sustainable development organized by either a company or a country. 3. ASSIGNMENT: Write a ½-page brief that summarizes the sustainable business practice implemented by the firm analyzed and the benefits to economic growth, ecological balance, and social progress plus a ½-page commentary on the benefits of sustainable development to an organization’s marketing strategy. Hand in your briefs and be prepared to present and discuss the issues of sustainable development during the next class period. 4-19 Chapter 4 TN: VIDEO CASE 4 Energy Performance Systems, Inc.: Cheap, Green Electricity EPS Synopsis: Whole Energy Slide 4-43 Energy Performance Systems (EPS) and founder David Ostlie believe they see both the forest and the trees. EPS has developed an electricitygenerating technology that is based on growing, harvesting, transporting, drying, and burning whole hardwood trees at very high temperatures—in existing or new power plants. Technical breakthroughs in forestry have made it possible for farmers to raise and harvest fast-growing hybrid poplars on tree plantations as a cash crop. Its combustion technology—using renewable energy—has the potential to reduce acid rain and harmful fossil fuel emissions. The company believes its technology is simple, offers lower-cost electricity, provides jobs in rural areas, and is environmentally clean. Though it has garnered several patents and demonstrated all stages of the technology from setting up tree plantations to stacking trees for burning, EPS has not yet been able to contract with an electrical utility to build an entire power plant. Students will conduct a cost-benefit analysis of the project and then analyze its marketing strategy to communicate its benefits to a variety of stakeholders—from utilities to environmentalists. Teaching Suggestions: David Ostlie, president of Energy Performance Systems (EPS) and inventor of the Whole Tree Energy™ (WTE) technology, believes that to commercialize the WTE to produce electricity is as much a task of marketing and education as it is one of technology. This means Ostlie and EPS have the job of educating many different groups, or market segments, about key elements of the WTE technology. In some cases this means challenging the “conventional wisdom”—what everyone takes as truth that, in fact, is wrong! The end-of-case questions lead students up to Question 5, the most critical question, about which segments must be educated or reached and the appeals and media to use. Answers to Questions: 1. Assume EPS builds a 100-megawatt Whole Tree Energy plant that proves successful and meets design objectives. What are the (a) benefits and (b) costs to these six groups: Society as a whole, government agencies that helped with initial research and development funding, EPS, other utilities with competing technologies, energy users in the region of the plant, and households living near the plant? Chapter 4 4-20 Answer: This question introduces students to a benefit-cost analysis of difficult technology trade-offs that might affect society as a whole in today’s global economy. Benefits and costs for the six groups appear in TN 4, Figure 1. Note that, as with any complex benefit-cost analysis of an issue affecting wider society, it is difficult to quantify precisely all the benefits and costs. For example, if the WTE plant is built and is a success, it is relatively easy to quantify the cost of energy and the jobs generated. But it is almost impossible to quantify the improved health of people in households living near the WTE plant—a very serious problem in the US today for households living near fossil-fuel power plants. 2. (a) If the WTE plant is built and is a failure, how does this affect the benefits and costs in Question 1? (b) Should governments support new technologies like WTE? Explain your answer. Answers: a. If the WTE plant fails to produce clean, low-cost electricity, then the benefits in Question 1 disappear. And some of the expected costs may become potential benefits—such as more land being available for food crops rather than for energy (tree) crops. b. This is an example of where the free market system may not always work to the consumers’ benefit and may require government financing in the initial research and development stage. Private utilities, concerned with achieving short-term profits, are reluctant to invest millions of dollars in a technology that may not work and will not be profitable for many years to come. So in the case of WTE, the government has invested several million dollars in hope that society will be better off in terms of cheaper electricity with less pollution and that, if successful, the WTE technology will be adopted by electric utilities around the U.S. 3. What are some of the key elements EPS should have in developing its strategy to market WTE to prospective utility buyers: Answers: Energy Performance Systems is using a “near-textbook strategy” in marketing its WTE technology to prospective utility buyers: a. Target key utilities likely to buy the WTE technology. This involves using selection criteria such as (1) need for additional power production capacity for users in its service area; (2) ownership of polluting fossil-fuel plants by the utility; (3) adequate supply of trees from natural stands, forest biomass residue, and waste wood; (4) likely availability of agricultural land on which to start natural-stand tree plantation; and (5) willingness of key decision makers in the utility to be innovative and try a new technology. 4-21 Chapter 4 b. Address concerns the buying utility may have. This involves the six major concerns identified in the case: (1) Can burning wood produce high enough temperatures to produce electricity efficiently? (2) Can whole trees be loaded, transported, and dried? (3) Are enough trees available to support a commercial-size power plant? (4) Are there environmental, pollutionreduction benefits for utilities? (5) What will a plant retrofitted with WTE cost? And (6) What will the cost be of electricity produced by a WTE plant? Some of these concerns will need to be addressed with additional research. c. Work with groups, or market segments, besides the utilities to get their support. As discussed below, this includes segments such as college students, the general public, scientists/opinion leaders, farmers, and individuals and agencies in the state and federal government. d. “Close” the first sale. As Dave Ostlie says in the case, “One electric utility must give WTE an honest try and then the technology should speak for itself.” e. Continue to innovate. As all organizations are learning, it is essential to find ways to serve the needs of customers more effectively. 4. As a concerned citizen, (a) what do you see as the key benefits of the WTE technology and (b) what do you personally see as the potential “show stoppers” for WTE—the critical things that can prevent it from being commercialized and becoming a reality? Answers: a. Chapter 4 Key benefits for WTE cited by Dave Ostlie and EPS include the following: Does not emit pollutants typical of fossil-fuel power plants that contribute to acid rain: SO2, NOx, polyaromatic hydrocarbons, and particulates. Does not add to CO2 emissions that lead to global warming as fossil fuels do because burning trees leaves the CO2 balance unchanged. Provides—based on research studies—lower cost electricity than fossil fuels or nuclear energy. Can retrofit mothballed and underused fossil fuel plants with severe pollution problems back in operation to provide lower-cost electricity. Can provide a new cash crop for U.S. farmers, which should reduce agricultural subsidies for many crops. Can reduce the U.S. strategic dependence on foreign oil. Can add U.S. jobs in growing, harvesting, and transporting whole trees and in operating power plants. 4-22 b. Will regenerate U.S. forests better through harvesting than if the trees died naturally, unless the forests were regenerated naturally by forest fires. Can use the wood ash as crop a fertilizer or return it to the forest floor. The general public typically identifies the following concerns as potential “show-stoppers” for WTE: Can EPS really burn whole trees? Can EPS get the high temperatures necessary to generate the steam that will produce the electricity? Are there enough trees to support a large power plant? Is it practical to raise trees as a cash crop? Do forests really regenerate better when harvested than when the trees are allowed to die naturally? Is WTE really nonpolluting? Can EPS really load and transport whole trees? These topics are representative of the kinds of questions asked—and hence the marketing and education problems that EPS must undertake. 5. A new product or technology like WTE requires educating a number of key groups, or “influencers,” about the technology. Excluding the electric utilities themselves, (a) what groups or market segments should EPS try to reach, (b) what key benefits should be emphasized to each, and (c) what promotional methods or media should EPS use to reach each segment? Answers: These are difficult and important questions for Dave Ostlie and EPS in trying to gain acceptance for the Whole Tree Energy technology. Besides electric utilities, the market segments EPS must reach include the following: the general public, environmentalists, college students, scientists/opinion leaders, farmers, forest owners, and both state and federal elected officials and agency heads. The reason for some of these may not be obvious. For example, college students are far more open to new ideas than many of the other segments and may ensure the WTE concept gets a fair discussion. State and federal elected officials (e.g. state governors, state and federal senators, and representatives) and agency heads (e.g., directors of state departments of natural resources, directors of federal agencies like the U.S. Forest Service, U.S. Environmental Protection Agency, and U.S. Department of Energy) are critical in helping provide grants to help fund a demonstration plant and to understand the benefits; as they become knowledgeable about WTE, they become potential advocates for it. 4-23 Chapter 4 Using these market segments, TN 4, Figure 2 summarizes the message or education each should receive in terms of the benefits identified and possible media to use in reaching these segments. Epilogue: By early 2002, David Ostlie and Energy Performance Systems (EPS) believed that they had turned the corner—more than a decade after the company’s startup. Some recent events affecting Whole Tree Energy: 1. Power purchase agreement to build the first plant. To commercialize WTE, it is critical to build a “demonstration plant” that shows the feasibility of the technology. To do this, it is necessary to sign a “power purchase agreement”—usually with an electric utility—that ensures the buyer will purchase electricity at an agreed-on rate and send it into the power grid. EPS, working with a developer, signed a power purchase agreement in 2000 with Xcel Energy, a large electric utility. 2. Potential agreement on plant construction. In early 2002, EPS was negotiating with a large utility to actually build a 50-megawatt power plant near Saint Peter in southern Minnesota: 20-megawatts to be produced by WTE and the balance from wood chips. This requires contracting for 46,000 acres of tree plantations. 3. US electricity shortages. In 2000, electricity shortages occurred in California, the East Coast, and the Midwest—causing electric utilities to look for new sources of power. Such shortages will necessitate construction of new power plants. 4. Tougher clean air standards. On March 26, 2002, the U.S. Court of Appeals cleared the way for the Environmental Protection Agency (EPA) to enforce strict clean air standards. The EPA says that the standards approved in 1997 will prevent 15,000 premature deaths, 350,000 cases of asthma, and 1,000,000 cases of decreased lung function in children . Especially targeted is ozone smog containing soot particles caused by power plant pollution. 5. New EPS planting and harvesting equipment. To make WTE competitive with other sources of electricity, the cost of the whole-tree fuel must be kept low. So Dave Ostlie, with assistance from the U.S. Department of Energy, has developed a new tree harvester that is capable of cutting, filling, and collecting trees on a tree farm about three to four times as fast as current tree harvesting equipment. He has also developed a “planter” that can plant about an acre an hour of fast-growing poplar tree “slips”—each 10 inches long. Chapter 4 4-24 TN 4, FIGURE 1 BENEFITS AND COSTS OF GROUPS AFFECTED BY A WHOLE TREE ENERGY PLANT Group Affected by WTE Benefits Costs 1. Society as a whole Less pollution Less global warming More environmentally friendly Shift of land from food to energy crops Jobs may be lost 2. Government agencies and taxpayers giving R&D funding to WTE Lower-cost electricity for consumers More internationally competitive industries because of low-cost electricity Tax revenues from EPS Taxmonies going to research on WTE rather than for other valuable uses Revenues, profits, jobs for employees None, if first WTE succeeds Caution: WTE must get “bugs” out of the design 3. Energy Performance Systems (EPS) 4 Utilities with competing technologies May adapt WTE technology May make some of their and reduce “pollution tax” dirty power plants obsolete, payments forcing closure and loss of jobs 5. Energy users in region of WTE plant Low-cost electricity May give manufacturers in region a competitive cost advantage 6. Households living near WTE plant Less pollution, cleaner air Additional large trucks on local highways transporting More available jobs in WTE whole trees to WTE plant plant, tree farms, and transportation 4-25 None, if first WTE succeeds Chapter 4 TN 4, FIGURE 2 SEGMENTS TO REACH AND MESSAGES AND MEDIA TO USE IN MARKETING THE WHOLE TREE ENERGY TECHNOLOGY P S Environmentalists P P Farmers S P S P Forest Owners1 Scientist/Opinion Leaders State Government Federal Government S Elected Officials S Agencies S Elected Officials S Agencies P S P P P S P P S S S S S P P S P P P S S P P S P P S S General audience newspapers, magazines Business newspapers, magazines Scientific and technical magazines P S Direct mail brochures College Students S Personal visits, talks, sales calls P Promotional Methods and Media to Use Regenerate forests S Reduce U.S. dependence on foreign oil Add forestry and power plant jobs Lower cost electricity S New cash crop for farmers No added CO2 General Public Market Segment to Reach Retrofit dirty fossil fuel plants No bad pollutants Benefits to Stress in Message to Marketing Segments P P S S P S S P P S S P S P P P P P P S P P S S P = primary benefit to stress in the message, or primary method or medium to use. S = secondary benefit to stress in the message, or secondary method or medium to use. 1 Includes federal, state, county, and private forests. Chapter 4 4-26 S S POWERPOINT THUMBNAILS Slide 4-1 Slide 4-2 Slide 4-3 Slide 4-4 Slide 4-5 Slide 4-6 Slide 4-7 Slide 4-8 Slide 4-9 Slide 4-10 Slide 4-11 Slide 4-12 4-27 Chapter 4 Chapter 4 Slide 4-13 Slide 4-14 Slide 4-15 Slide 4-16 Slide 4-17 Slide 4-18 Slide 4-19 Slide 4-20 Slide 4-21 Slide 4-22 Slide 4-23 Slide 4-24 4-28 Slide 4-25 Slide 4-26 Slide 4-27 Slide 4-28 Slide 4-29 Slide 4-30 Slide 4-31 Slide 4-32 Slide 4-33 Slide 4-34 Slide 4-35 Slide 4-36 4-29 Chapter 4 Chapter 4 Slide 4-37 Slide 4-38 Slide 4-39 Slide 4-40 Slide 4-41 Slide 4-42 Slide 4-43 Slide 4-44 Slide 4-45 Slide 4-46 Slide 4-47 Slide 4-48 4-30