Ross Net Impact Conference 2010

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You can’t make deep change in the world unless you change yourself. … If you want to change the world, you have to get people to do things they’ve never done before.

- Ross Professor Robert Quinn, discussing how to be an effective change agent.

Don’t feel ashamed for being business people. Don’t be ashamed to be American entrepreneurs.

- Fredo Arias-King, president of T&R Chemicals Inc.

When Strategy Trumps Finance

Sometimes, strategy has to trump finance. Fredo Arias-King, president of T&R Chemicals, worked on a project that helped the environment and his company. Property rights laws are weak in Mexico and the country suffered years of deforestation. T&R needs resin from pine trees and the country’s laws and lack of forests are major constraints. But indigenous Native American tribes and some collectives in Mexico have strong land protection. So the company worked with tribes to re-forest their land, allowing the inhabitants to sell the tapped pine resin. Pine resin is used in hundreds of products such as adhesives, chewing gum and cleaning solution. This solved problems for both sides. “A resin tapper is the best forest steward,” he says. T&R funded the project and buys about 40% of the resin. The project is not a money maker – it works out to be about neutral – because of the “free rider problem.” Other companies buy resin from the lands also, benefiting from what T&R funded.

But here’s where the strategy card comes in. China is the world’s largest producer of crude gum. But its domestic consumption is rapidly gaining on its supply. Arias-King says that by 2020, the situation will come to a head and one possibility is that China will declare gum resin a critical commodity and protect it. His company must have access to a reliable supply. So while this project might not make sense financially, “strategically, it’s something you have to do.”

Scale is important … We cannot just be food for the elite.

- Gary Hirshberg, president and CE-YO of Stonyfield Farms, talking about growing organics.

Making Organic Profitable

Stonyfield faced a problem trying to break into the yogurt business. Its gross margin was 10% higher than Dannon and Yoplait. To get around that it had to find a shortcut around the traditional packaged food model – cheap prices, bigger margin, build brand awareness, get trial purchases, repeat purchases, regular purchases, and finally loyalty. Hirshberg skipped the middle parts and went right to loyalty, spending next to nothing on advertising. So it used other ways to communicate. It put items of interest in its lids. It allowed customers to send in lids and adopt a cow. It created YoTube to show videos of farms and sugar harvesting. It gave samples to train commuters in Chicago while trying to break into that market.

“That’s what you do when you don’t have money. You get creative,” Hirshberg said. The end result is a higher net margin than its competitors.

Stonyfield President and CE-YO Stirs It Up

Net Impact 2010 at Ross is underway with Gary Hirshberg, president and CE-YO (yes, that’s his title) of Stonyfield Farms, the famed organic yogurt producer. He begs to differ with CEOs who preach about the primacy of the shareholder. “I really don’t think there can be a primacy of the shareholder when the other stakeholders are losing,” he says. How can a company be successful and destroy its supply chain or mistreat employees so they constantly leave? Hirshberg believes companies are successful when all stakeholders win, not just shareholders.

The history of business and agriculture usually has been one where somebody loses, he says. Hirshberg is changing the game and still making money. Stonyfield has enjoyed a 23% compound annual growth rate over the last 20 years.

Efficiency=Supply

New York City has started an interesting program with Con Edison that Greg Hale of the Natural Resources Defense Council thinks should be rolled out nationwide. The city and the utility will do a five- to ten-year plan to identify constraints in all of the service grid areas. When they find an area where supply won’t meet demand, they put out an RFP for efficiency improvements in that area instead of spending for new generation and transmission. It goes to prove that sometimes efficiency is the best source of supply, Hale says.

I do think there are ways we can get capital moving into this (energy efficiency) sector. The first thing you have to do is prove the energy savings.

- Greg Hale, senior financial policy specialist, Natural Resources Defense Council

Automakers have big, complex supply chains and the social risks aren’t with their top – tier one – suppliers. The risk is seven or ten steps down the supply line, says Monique Oxender, global manager of supply chain sustainability for Ford Motor Co.

Automakers are being held responsible for those issues down the chain and contract language with the tier one suppliers isn’t going to solve the problem. Increasingly the auto companies are being held responsible for issues all the way to the end of the supply line.

A big issue for companies with supply chains is how to make sure things they buy aren’t made in sweatshops or places with poor labor standards. A panel on Exploring the Social Dimension of Supply Chain Sustainability provides some guidance.

A good place to start is understanding the local markets from where you’re sourcing. Companies should get country risk assessments from NGO and ask some tough questions, says Eric Olson of Business for Social Responsibility. What’s the rule of law like? Who makes the decisions? What’s enforcement like? “It sounds like a lot of work, he says. “It is a lot of work.” But it’s also something a good business should do.

Companies need to do the kind of due diligence they would do if they were building a bricks-and-mortar location, says Bama Athreya, executive director of the International Labor Rights Forum. Before sourcing from a location, it’s a good idea to engage the local population. Too many companies are the last ones to know that a particular industry in a country is well-known for risks such as child labor.