January 1st - New Years

In This Issue

Five events that changed the world in 2006


Economic Notes:


This Weeks Leads:



When social issues become strategic

Executives ignore sociopolitical debates at their own peril. – Second of two installments

Blurring boundaries between responsibilities and laws

It is increasingly unclear who should provide basic social services (eg, pensions, public-health services, school infrastructure), regulate business and personal behavior (eg, self-regulation vs government oversight), and be accountable for protecting rights, public goods, and resources.

What it means for business (selected examples):

  • Responsibility for obesity shifting from individuals to companies in food and beverage sectors
  • Provision of insurance benefits shifting from employer to employee

Since 1990, more than 100,000 new citizens' groups have been established around the world. Even in China, a country not known for freedom of political expression, the number of social protests increased from just under 10,000 in 1993 to more than 58,000 in 2003.1 The balance of power has shifted in favor of individuals and small single-issue groups increasingly armed with tools and tactics that can easily be deployed through the Internet. Trust in nongovernmental organizations (NGOs), citizens' groups, and online information sources has risen as inexorably as faith in business—Enron, WorldCom— has declined.

Management's slow reaction

Large organizations must shift their thinking in this area. Typically, businesses are taken by surprise when faced with negative press and stakeholder pressure. After all, they provide plenty of benefits to society—products of good quality or low prices—and employ vast numbers of people. Yet the rising tide of expectations means that companies must now strive to anticipate and understand those expectations and to embed them in their business strategy.

In the banking industry, for example, money center banks have been caught out by higher expectations. Criticized for making loans to companies that damage the environment, several have now pledged, in different ways, to restrict their lending and underwriting for industrial projects that would have an adverse environmental impact. These moves were largely reactions to protests coordinated by the Rainforest Action Network.

Companies are often on the defensive because CEOs and others in the top team find it difficult to wield what Harvard's Joseph Nye calls "soft forms of power"2 or to deal with players, such as NGOs, that trade in emotional arguments. By comparison with the hard skills and in-depth knowledge of most senior executives, sociopolitical issues require statesmanship, the fostering of relationships with stakeholders, and the nurturing of assets that could be called "reputational." Irritatingly for many executives, the arguments of pressure groups are frequently low on evidence. Furthermore, estimating the impact of most sociopolitical trends on corporate value requires executives to make assumptions and test sensitivities that MBA textbooks generally don't discuss.

How to manage these forces

We believe that the case for adopting a wholeheartedly strategic approach to the sociopolitical agenda is threefold. First, these forces can alter an industry's landscape in fundamental ways. In pharmaceuticals, for instance, social concerns about the cost and safety of the industry's products, as well as access to them, have made the regulatory environment tougher during the past decade. CEOs should take part in the debate so that they, their employees, and their investors have a stable set of rules.

Second, the immediate financial and longer-term reputational impact of social issues that backfire can be enormous. Ask Monsanto, which lost significant market value in the backlash against genetically modified organisms (GMOs) in the European Union, or ExxonMobil, whose cleanup costs for the Exxon Valdez oil spill amounted to $2 billion—on top of $5 billion in lawsuits.

Finally, new product or market strategies can emerge from changing social and political forces. Toyota Motor's success with the Prius can be attributed to a growing interest in environmentally friendly products. Unilever's innovative product offerings in developing countries, such as its Wheel detergent brand in India, were a response to the unmet needs of lower-income consumers there.

At the practical level, a company can take a number of steps aimed at making its approach to sociopolitical issues more strategic. It can develop "radar" systems to anticipate future risks and opportunities, master the range of options available for dealing with them, engage in the external debate, and ensure that the entire organization takes part in a coherent and forceful way.

Develop reliable radar

Sociopolitical issues and regulatory shifts may appear to come out of the blue. But the success of savvy newcomers such as Whole Foods Market confirms the fact that companies can indeed spot new trends and that early-warning signs of imminent change are plentiful. Not all issues, of course, evolve in a way that changes the social contract. Nonetheless, an early awareness of the concerns of NGOs and stakeholders enables companies to join and shape the debate before it turns against them—or at least to prepare themselves for turbulence ahead. Businesses that end up publicly fighting their stakeholders can well damage the brand or destroy the morale of their employees; much better to engage in a minor strategic foray than to be forced into a full-scale war.

In fact, our survey suggests that executives already know that they need to anticipate social pressure much more successfully. In our view, they should use systematic methods, including trusted techniques such as economic analysis and scenario planning, to evaluate the strategic impact of sociopolitical trends. If companies had tracked topics such as the obesity debate in the media, they would have become aware that reports on those issues were appearing more and more frequently in the mid- 1990s. But volume alone isn't a sufficient guide. New evidence from, say, a well-respected academic can quickly change the dynamics of an argument. The obesity debate is one of those that took a significant turn during the 1990s. We can measure the change by following articles in the New York Times (Exhibit 3): blame for the problem shifted from individuals (overeating, lack of exercise) to "environmental" causes, including corporate marketing. The new outlook was at least in part the result of research by Harvard's Walter Willett showing a link between childhood obesity and the marketing of junk food.

Large-scale problems generally start as small regional ones before Western NGOs champion them

Local antennae are also vital. Large-scale problems generally start as small regional issues before they are championed by larger, typically Western NGOs that have the clout and media contacts to launch global campaigns. The triggers are often practices—for example, working conditions that are below Western standards or "facilitation payments" to local government officials—that seem acceptable in some countries but not others. These practices may have a detrimental effect on corporate reputations when activists highlight and replay them for a global audience. What's more, the damage will be done notwithstanding any ethical policies that may have been promulgated throughout a business. Most companies become aware of the risks only at this late stage, when their direct stakeholders have already started to change their behavior. Mapping the landscape of different stakeholders is therefore important for a company's sociopolitical radar system. An understanding of the influence of various groups, their agendas, and their level of activism is a vital first step before a company chooses the best partners for its socio-political strategy.

Companies should aggregate this information to identify where they are most at risk and the economic implications of potential actions by stakeholders—particularly when they face a number of issues all at once. To evaluate what's at stake, companies must scan the whole value chain, looking, for example, at the way they source raw materials and make and sell their products. They should develop potential future scenarios that take into account the reaction of competitors, shifts in consumer patterns, and the possibility of litigation and regulation. Governments, for instance, may ultimately regulate the sale of fast food in schools through legislation or enhanced nutritional requirements for any foods sold in them (this issue is currently under debate in the California legislature). Alternatively, the success of several class action lawsuits could force the food and beverage industry to negotiate multiyear settlements. At the consumer level, educational campaigns and articles in the media will likely promote healthier options for food.

Place strategic bets

Armed with a more solid approach to the management of social issues, companies can not only reduce the risk to their reputations by anticipating new regulations but also create value by making the most of social and political shifts.

Indeed, companies should place bets on opportunities that emerge from their radar-tracking activities. Toyota's Prius is an example: the car's initial success puts the company in a position to move hybrid technology toward profitability faster than its competitors can as well as to augment its reputation by helping to address environmental issues—even if the jury is still out on the technology's effectiveness. GE's ecomagination initiative, reinforcing the company's commitment to clean products and reduced emissions, is a relatively low-cost, low-risk way of anticipating products and services that might be built on the back of emerging sociopolitical trends.

In general, more uncertain circumstances warrant a broad set of strategic options, and less uncertain circumstances warrant more narrow ones. To cope with emerging sociopolitical issues, we would expect companies to use a wide range of small investments that should be culled and narrowed as the issues move further into the explicit social contract with business. Given the unpredictable way socioeconomic trends develop, a strategy using a portfolio of initiatives is particularly relevant.3

Participate in the external debate

CEOs should also be prepared to take the lead in socioeconomic debates that could alter the structure of their industries and the rules of engagement in the long term. Business, in essence, involves a series of complex and continually evolving social trade-offs. In the power sector, the goals of low prices, energy security, and environmental friendliness are in permanent tension. So are the affordability of drugs, product safety, and innovation in pharmaceuticals. Business leaders need to raise the public's understanding of these unavoidable trade-offs.

The seminal 1997 speech of John Browne, BP's CEO, on global climate change—when he promised that BP would become an active, concerned participant in dealing with the problem of global warming—was notable as the first time a multinational corporation (other than a reinsurance company) had joined the emerging consensus on the topic. Bruce Bodaken, of Blue Shield of California, was the first health plan CEO to offer a proposal specifically for universal health coverage in his state.

To reduce uncertainty for all players, including investors, businesses need stable guidelines about the future evolution of their industries. An analogy can be made with the technological shifts that occur before industries adopt common standards. Industry leaders are in a strong position to ensure that a rational, evidence-based discussion of social and political trade-offs takes place. Without such a discussion the social contract remains unpredictable, investors suffer, and the social benefits of finding appropriate solutions are deferred.

Like any strategic shift, calls for change in the social contract involve a degree of risk. But if a company could be seen to have any responsibility for causing a sociopolitical problem, change is a no- regrets move, particularly for an industry leader that has the scale to alter the market. In some cases, change can confer a clear strategic advantage: for example, after the "blood diamonds" campaign,4 De Beers helped to develop a global certification system that enabled it to charge a premium for diamonds mined in conflict-free areas. Few companies get involved in a sociopolitical debate at the stage when they might be at risk for being ahead of the curve. The prevalent risk is not getting involved early enough.

Collaborate, cooperate

Many sociopolitical issues are intractable and can't be resolved by a single company or even an industry. The most successful companies see beyond competitive rivalries and look for collaborative ways both to meet social concerns and to find new ways for industries to create value. The difficulty is knowing when to work with others and when to go it alone.

Working across different organizations with different cultures can be time consuming and slow moving; Nike and other branded marketers took seven years to establish the Fair Labor Association to strengthen labor rights in the supply chain. Industry associations often lack the capabilities to tackle broad issues across a sector, as well as the power to mobilize enough support. That's why CEOs of mining companies recently set up a new body, separate from the existing industry association (the International Council on Mining & Metals), to take on the sociopolitical issues facing them.

Coca-Cola and PepsiCo have benefited from a common approach to marketing to children under 12: both have a clear policy not to market their core carbonated soft drinks to this group. For other collaborative efforts, the attractions are the potential revenue upside and the ability to share costs. As a rule, companies should consider responding on their own if they think they can capture the first-mover advantage (as BP did in acknowledging the dangers of global warming), if they are a target, or if a collective approach is too difficult or costly. Collaboration can be attractive if the stakeholders regard all companies as equally culpable, if regulation is imposed on an entire industry, or if isolated, individual action would clearly destroy value.

and coordinate

As our survey indicates, most business executives expect CEOs to take the lead in managing the corporate sociopolitical agenda. What's more important, though, is how well companies integrate such issues not just into the making of strategy but also across all dimensions of the business (Exhibit 4). A piecemeal approach runs the risk of misalignment— a CEO saying one thing, the rest of the company failing to translate these fine intentions into practical action. A company whose external-communications strategy emphasizes the search for more environmentally friendly products and processes, for example, probably won't make much headway if the company's government and regulatory functions are simultaneously fighting limits on carbon dioxide emissions.

Without a CEO's personal involvement, sensitivity to the sociopolitical agenda probably won't become embedded in an organization's culture and values. Neither will organizational coordination—always difficult to achieve across different divisions and functions—for the CEO plays a vital role orchestrating departments (such as PR, legal, regulation, and marketing) that ordinarily wouldn't act in concert. When CEOs such as BP's John Browne and GE's Jeff Immelt show their personal commitment, the response from stakeholders is remarkably positive.

Sociopolitical trends will increasingly affect the strategic freedom of companies, which just can't ignore the rising tide of expectations resulting from these trends and the power and influence of the stakeholders who mobilize around them. For stakeholders, companies are, in many ways, already agents of social change and must become much more deliberate in understanding the way they affect society. Businesses that follow the approach we outline and proactively understand and engage with social issues will benefit most. They will be better able to shape the social contract and to identify ways of creating value from the opportunities and risks arising from sociopolitical issues.

Source: McKinsey & Company, 2006


When social issues become strategic - Pt 2

Five events that changed the world in 2006

  • Five events that changed the world in 2006
  • When Chou En-Lai was asked about the long- term impact of the French revolution, he famously replied: “It’s too soon to tell.” That sort of lofty vagueness can earn you a reputation for great wisdom if you happen to be a Chinese revolutionary leader. But for a journalist to adopt a similar approach would be professional suicide – rushing to judgment is all part of the job.

    So, in that spirit, is a shortlist of the five most significant events of 2006, in chronological order.

    1. January: Russia blocks gas supplies to Ukraine. A cut-off of energy supplies between two neighbouring countries, which lasted just a couple of days, could have been trivial. But Russia’s decision to turn off the taps to Ukraine marked the moment at which western Europeans began to feel directly threatened by developments inside Vladimir Putin’s Russia. The cut- off temporarily affected supplies to western Europe. That underlined both the European Union’s growing dependence on Russian energy and Russia’s willingness to use energy as a political weapon.

      Even the US took notice. In May Dick Cheney, vice-president, gave what was regarded as a tough anti-Russian speech. But by the end of the year, his remarks were sounding rather mild. Heavy-handed Russian pressure on western companies to renegotiate oil and gas deals, as well as the unsolved murders of critics of the Putin government ensured that Russia’s reputation was still heading downwards at the end of 2006.

    2. February: the bombing of the golden-domed mosque in Samarra. No one was killed by the bomb that all but destroyed the Askariya shrine, one of the holiest sites for Iraq’s Shia Muslims. But the blast probably marked the point at which events in Iraq spiralled irretrievably out of control. Until Samarra, the restraint of Shia Muslims in response to Sunni terrorism was one of the few reasons for hope. After Samarra, Shia restraint fell away. Within days hundreds were killed in reprisals and scores of Sunni mosques were attacked. Over the course of the year, the Shia militias of Moqtada al Sadr gained power and sectarian violence grew. During 2006 many thousands of Iraqis have been killed, almost 800 American troops have died and as many as 1m refugees may have been created. By the year end, US public opinion had turned decisively against the war.
    3. May: “An Inconvenient Truth” opens in American cinemas. This could go down as the year in which global warming finally became a significant popular issue across the western world.

      Al Gore’s film opened in New York in May and has since become the third top-grossing documentary film of all time. By July, the book of the film was top of the New York Times best-sellers’ list. The former vice-president also took the film on a global tour, with special showings arranged at the Australian parliament and in Brussels, Paris and London.

      Europeans are still clearly more exercised about global warming than Americans. But things are changing even in the US.

    4. In August California passed its Global Warming Solutions Act, trying to cap the state’s level of carbon dioxide emissions. Other states on the eastern seaboard have taken similar initiatives.

      Of course, none of this is likely to stop global warming. But at least we can be guaranteed a significant increase in global hand-wringing.

    5. July: war breaks out in Lebanon. The Israeli invasion of southern Lebanon in pursuit of Hizbollah led to an outbreak of bloody fighting, large-scale civilian casualties, an international outcry and, eventually, an uneasy ceasefire. It also confirmed the world view of those who regard Israel as the main source of instability in the Middle East.

      But the Lebanese war also fed an alternative interpretation – one that sees the rising power of Iran as the most destabilising factor in the region. Israel’s inability to inflict a clear defeat on the Iranian-backed Hizbollah fed Iran’s confidence – which was already growing because of America’s problems in Iraq, the rising oil price and the world’s inability to stop the Iranian nuclear programme. Israel and America were most vocal in expressing concern about Iran – and in particular, President Mahmoud Ahmadi-Nejad’s repeated prediction of the disappearance of Israel. But Iran’s Sunni Arab neighbours are clearly also very concerned by the rising power of Shia Persians.

      By the end of the year, Hizbollah was putting increasing pressure on the pro-western government in Lebanon and Mr Ahmadi-Nejad was hosting a conference of Holocaust deniers in Tehran. The chances of Israel or the US bombing Iran’s nuclear facilities in 2007 are rising.

    6. November: America’s mid-term elections are held. The Republicans’ loss of control over both houses of Congress turned George W. Bush into a lame-duck president overnight. The elections were seen as a repudiation of an unpopular war in Iraq. The day after the vote, Donald Rumsfeld resigned as defence secretary.

      But the idea that the election would inevitably lead to a new policy in Iraq was looking shakier by the year’s end. The catalyst for that change in policy was meant to be the report of the Baker commission into the war. But when Mr Bush received the report in early December, he seemed disinclined to accept its main recommendations on dialogue with Iran and Syria and a reduction of American troops. Perhaps this is one big moment, which will seem less of a turning point in a few years’ time.

      Looking back at that list, there is one obvious omission – Asia. Yet extraordinary economic growth in China and India is probably the most significant economic and political development of our era. There were events in 2006 that served as signs of the rise of China and India. Mittal Steel, run by an Indian expatriate, took over Arcelor, Europe’s biggest steelmaker; the Indian stock market hit new heights; more money was raised in new share issues in Hong Kong than in New York or London and China overtook Japan in research spending. In one November week, the Chinese government also played host to 48 African leaders and to a summit of south-east Asian government heads.

      None of these events had the drama of a Middle Eastern war or the electoral humiliation of an American president. The rising power of Asia is a process, not an event. Where will that process ultimately lead? In this case, it really is too soon to tell.

      Source: The Financial Times Limited 2006

  • Jobs
  • Utah Labor Market Indicators - November 2006

      • Employment Growth: 4.9%
      • Employment Increase: 57,700
      • Unemployment Rate: 2.6%
      United States
        • Employment Growth: 1.3%
        • Unemployment Rate: 4.5%

        Source: Utah Dept of Workforce Services

  • Economic Notes:
    • MBA Mortgage Applications Survey
    • Mortgage demand decreased 10.2% in the week ending December 12. Purchase applications decreased 5.9% and refinance applications decreased 14.6%.
    • UBS Index of Investor Optimism
    • Investor sentiment heads into the new year on solid footing. In December, the UBS Index of Investor Optimism chimed in at 90, down slightly from 93 the month prior. Investor optimism is being supported by low gasoline prices, cresting inflation, subsiding fears of a housing market crash and reduced U.S. market volatility.
    • Durable Goods (Advance)
    • New orders for durable manufactured goods rose a larger than expected 1.9% in November, following an 8.2% drop in October. The headline number masks a very weak report, however; outside of transportation, orders fell 1.1% and orders for capital goods fell 1.4%.
    • GDP
    • Annualized real GDP growth in the third quarter saw a downward revision, to 2.0%, from the preliminary estimate of 2.2% reported last month; this was a larger downward revision than expected. The downward revision resulted from a downward revision to consumer spending on services. Economic growth remains below potential, with housing continuing to lead the slowdown. Profits from current production increased $61.5 billion at an annualized rate from the second quarter; profit growth saw a slight downward revision compared to last month’s estimate.
      • State Personal Income
      • Personal income grew by 1.4% in the third quarter of 2006, following a downwardly revised increase of 0.8% in the second quarter. Income growth accelerated in all regions of the country, and for the second straight quarter, the fastest growth was in the Southwest. New England saw the slowest income growth.
      • Personal Income
      • Personal income rose 0.3% in November, in line with expectations and the downwardly revised 0.3% increase in October. Spending rose 0.5%, up from October’s upwardly revised 0.3% gain. The core PCE deflator was unchanged, as was the topline deflator. The saving rate fell to -1.0%.
      • Weekly Natural Gas Storage Report
      • Underground storage of natural gas decreased by 71 billion cubic feet during the week ending December 15, in line with expectations. Inventories are now 9.5% above the five-year average. This report will add bearish pressure to prices.
      • Oil and Gas Inventories
      • Crude oil inventories fell sharply by 6.3 million barrels for the week ending December 15, according to the Energy Information Administration, well above expectations, for the second week in a row. Distillate inventories rose by 1.4 million barrels. Gasoline stocks rose one million barrels, both slightly above expectations. A slight rebound in refinery activity and a sharp drop in imports drove this drop in inventories. The report will put upward pressure on energy prices.

  • Grants:
  • Improve Rural Business!

    • Rural Business Opportunity Grants
    • POSTED: 12/8/2006
    • ELIGIBILITY: Empowerment Zones, Enterprise Communities, Rural
    • Economic Area Partnerships and Indian Tribes $ AVAILABLE: N.A.
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    Find Strategies to Reduce Traffic Congestion!

    • Urban Partnership Agreements as Part of Congestion Initiative
    • POSTED: 12/8/2006
    • FUNDING SOURCE: Dept. of Transportation
    • ELIGIBILITY: Public agencies serving metropolitan areas $ AVAILABLE:
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    • DEADLINE: 4/30/07
    • CONTACT INFORMATION: David Horner, david.horner@dot.gov
    • DESCRIPTION: Grants to demonstrate strategies that will reduce traffic congestion.

    Maintain Historic Resources and Sites!

    • Preserve America Grants
    • POSTED: 12/1/2006
    • FUNDING SOURCE: Dept. of the Interior
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    • MAX GRANT SIZE: $150,000 DEADLINE: 2/14/07
    • CONTACT INFORMATION: 202-354-2020
    • DESCRIPTION: Funding for planning, development, and implementation of innovative activities and programs in heritage tourism such as surveying and documenting historic resources, interpreting historic sites, planning, marketing, and training.

  • This Weeks Leads:
    • Benihana
    • Benihana, Inc. trades as Benihana at 74 locations nationwide.
    • The Japanese-style hibachi steakhouses occupy spaces of 7,500 sq.ft. in freestanding locations.
    • Growth opportunities are sought nationwide during the coming 18 months.
    • Preferred demographics include a population of 250,000 within five miles.
    • For more information, contact
      • Tom Bergen,
      • Benihana, Inc.,
      • 8685 Northwest 53rd Terrace,
      • Miami, FL 33166;
      • Web site: www.benihana.com..
    • Max Brenner
    • Max Brenner operates 19 locations throughout NY and internationally.
    • The stores, offering a variety of chocolate products, occupy spaces of 3,000 sq.ft. to 4,000 sq.ft. in street front locations.
    • Growth opportunities are sought throughout metro New York, NY during the coming 18 months, with representation by Northwest Atlantic Real Estate Services.
    • For more information, contact
      • Chase Welles,
      • Northwest Atlantic Real Estate Services,
      • 711 Westchester Avenue,
      • White Plains, NY 10604;
      • 914-328-2222,
      • Fax 914-328-2121;
      • Email: chase@nwatlantic.com;
      • Website: www.maxbrenner.com.
    • Cheese Steak Stop
    • Cheese Steak Stop operates 21 locations throughout CA.
    • The sandwich shops occupy spaces of 1,500 sq.ft. in malls and strip centers.
    • Growth opportunities are sought throughout northern CA during the coming 18 months.
    • For more information, contact
      • Keith Layton,
      • Cheese Steak Shop,
      • 734 Alfred Noble Drive,
      • Hercules, CA 94547.

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