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Corporate Social Opportunity? An interview with George Carpenter, Director, Corporate Sustainable Development, Procter & Gamble. |
 Procter & Gamble is a large multinational business in the consumer goods market. The company markets nearly 300 products in more than 160 countries, has 110,000 employees in nearly 80 countries and reported net earnings of $6.48 billion for the fiscal year ending June 30, 2004. George Carpenter is Director of Corporate Sustainable Development at the Procter & Gamble Company. Prior to this, he managed the global Health, Safety and Environment Program for P&G’s worldwide operations. Mr. Carpenter is involved in the US Council for International Business, the World Business Council for Sustainable Development and the International Chamber of Commerce. He was on the drafting committee for the Global Sullivan Principles on Corporate Social Responsibility, and was one of the founders and the first chairman of the Global Environmental Management Initiative (GEMI). |
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In
your sustainability report you say that “we can build our businesses while
contributing our part to help address some of the toughest global health and
social issues.” You also say that it is P&G’s vision that you can link
business opportunity with corporate responsibility to create a concept you call
“corporate social opportunity.”
Do you really think it is possible to
enter developing countries with a profit making mind-set and achieve social
goals at the same time? |
 Let me back up a little bit to the genesis of all
that.
In 1999, at a corporate restructuring, we were trying to figure out
what to do with P&G’s environmental organization. There was a lot of concern
that despite having made enormous investments in environmental innovations in
products and packaging, we never really created a competitive advantage in the
sense of a new business; we achieved savings from materials reduction and saved
bottom line cost, but we never created new consumers, new markets and new
products despite fairly sizable investments. As a result, green marketing had a
bad name in our marketing department, in our company and across the business in
general.
In 1999, the concept of sustainability was introduced. Because
it integrated the social, economic and environmental issues into a holistic
framework, we thought there was a potential to build business value around this
concept.
The model we used was digital communication. The argument to
senior management was that developing countries moved to cellular communications
much faster than the North did; while only the rich lobbyist and stockbrokers
had cell phones in New York, if you went to Mexico City, everyone had cell
phones because the regular phones did not work. Not only was the adoption rate
faster, but the developing countries will never build the same hardware
infrastructure we did. Based on these observations, we thought that there is a
way to think about consumers we do not serve today, that if we design products
specific to their needs and aspirations and the realities of their life, rather
than transferring products that were designed for Europe and North America, that
we could create large new markets. That was a hypothesis. The key was that we
were going to develop products specific to those consumers –not try to sell them
what was left over from the North.
Since then, we have launched several
products for the bottom of the pyramid market. The first one was in nutrition;
it is a drink mix that provides micro nutrients to children. It was developed
when UNICEF approached us to develop a fruit drink with appropriate nutrients
for children. We set up to market it in Venezuela, but we got caught in the
political instability there. We were doing quite well, we were selling it
through McDonalds for example, but it was not reaching the level of people who
really had the problem. We needed a lower cost model for that, but did not have
the chance to restructure the business given the political instability there,
and as we were looking at what we would do next, we sold most of our food and
beverage business. Today we have licensed this product in Nicaragua, and it is
sold through a distributor who manufactures and sells it there. Others have
approached us to distribute it in Africa. Our second product developed for the
bottom of the pyramid market was our water purification product, PUR. This
powder turns ten liters of dirty water clear in 15 minutes.
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| In your Sustainability Report you also mention that one of
your goals is to “develop new business models appropriate to lower income
developing country markets.” Why is this in P&G’s interest? Would it not be
more profitable to invest in new products for the developed countries?
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Absolutely, that is why all the MNCs are concentrated in
the North; that is where the wealth is concentrated. But the issue is that there
are more and more companies competing for that same piece of the pie at the top,
ignoring about four and half billion people on the planet. Certainly today our
business is at the top of the pyramid; we make 46 percent of our revenue in
North America, 26% in Europe, and the remaining scattered across Asia, Latin
America and a small amount in Africa and the Middle East –so about 20 percent of
our revenue comes from the least developed markets. But if you look forward in
the long term, a company can only grow if it continues to adapt and seek out new
markets. That includes lower income consumers in general, not only in developing
countries. Our developing world markets are growing faster today than any of the
other markets, and our CEO has spoken of developing country markets as a huge
source of income growth for P&G in the future. The share of developing
country revenues will definitely grow over time.
However, these markets
require different models of packaging and promoting. Many of the lowest income
consumers are illiterate, we don’t have access to traditional media means for
promotion, etc. -so there are lots of challenges. It is clear to us that this is
not doing business as usual. This is not taking the products and models of how
we go to market and try to apply them elsewhere. I believe the business
proposition of the BOP is still a hypothesis for business, and once somebody
finds the business model that solves the challenges, this could become as big as
total quality was in the 1980s in terms of revolutionizing how you think about
business.
I have often said scale is the biggest advantage and
disadvantage we have as a large multinational company. In the case of developing
the water product, our scale allowed us to leverage research labs in different
parts of the world to develop a low cost effective product. On the other hand,
scale is our biggest obstacle; while it allowed us to launch test markets in 4
continents simultaneously and do clinical studies in three countries, along with
this came developed world overhead costs. My challenge is therefore overcoming
the cost disadvantage I have of doing business. Large companies also do not want
1 million dollar businesses; they want 100 million dollar businesses, so the
mountain to climb before the investment is worth it is high. |
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| From what I understand you are testing different business
models with the water product. Tell me more about these models and how they are
working out this far? |
There are three separate business models that we have
worked on over the past 4 years. In Pakistan we marketed under a traditional
P&G model under the P&G brand. We called this the commercial model. We
then adopted what we call the social model, where we really leaped down the
pyramid, in Haiti and Uganda. The third model was a disaster relief
model.
The model in Pakistan, coordinated with a public campaign on
sanitation, is falling a little short of where it needs to be. It shows the hard
part; the scale we have to create is so big in order to write off all the
overhead and all the P&G costs of going to market.
The social markets
model has just launched in Uganda and Haiti, and we are still early there, but
we are meeting the success criteria.
The disaster relief model works. The
product is stable, storable, it can be shipped at large quantities, stored, and
delivered to where it needs to be. We licensed the product to an NGO, Population
Services International, and they own the right to distribute it and sell it in
those countries. Donor agencies, governments and foundations pay the up-front
market development costs, which is the big barrier. Particularly in countries
like Haiti, you will never get anyone to invest there on a commercial basis, so
that lowers the risk and the amount of product we have to sell; you don’t have
as much to recoup. This has just been operating for 2-3 months, but it is
tracking well in relation to our metrics. |
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| So, the customers in the disaster relief model are the
relief agencies? |
| Yes. These customers are now coming back and want more. And
we have committed that we will sell the product at break-even. |
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| From a business perspective, why would you sell at
break-even? |
| We are very sensitive not to be perceived as using public
money for helping the profits of big multinationals. We are therefore trying to
separate projects that we think are more of a research type of thing. Right now
it is not a problem to say that we are not making any money, because the
expenses as you start up are huge. We have committed to sell our products at
what we believe are our long-term going costs. |
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| Some of our members are policymakers and are interested in
attracting foreign investment to their countries. When you look at which
developing country markets to invest in, what are the most important factors you
consider? |
| The most important is strong national governance. It is
hard for a company like P&G to compete with whatever companies are in the
market place today where rule of law is not enforced and corruption is rampant.
If you go back to our sustainability report of two years ago, there is an
example in there where we in response to a customs official requiring a bribe to
let our shipment get through, ended up shutting down our operations for 4
months. Eventually we always win. We took it all the way to the president of the
country, 4 months later we could start production again, but if that is the norm
in a country you cannot expect companies to come and be profitable there. The
issue of strong national governance, enforcement of rule of law, a rule-based
economic systems, a free judiciary, absence of bribery and corruption, laws to
protect advertising claims (one of the problems we had with our micronutrient
product was that competitors were making spurious claims regarding our product
that vitamin A does all these things to you, and there was no mechanism to
challenge that and consumers were confused –who am I going to believe?) are all
necessary conditions to attract foreign investors. |
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| So if you encounter corruption, you will actually go to the
step of shutting down your operation? |
| Yes, absolutely. It’s against the law. In the longer term
it will prove to officials in the country that P&G is not going to play by
these old rules. The down-side is that your business may never make it to the
future –you just cannot succeed. It is the people in these countries who lose at
the end of the day because they do not have access to the same quality of life
that you and I take for granted. They never get it because nobody can do
business there. |
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| Some of the countries where P&G does business are known
for human rights violations. Some claim that corporations such as yours should
not invest in these countries because you by virtue of investing there support
the practice of these governments. What do you think about this? |
| MNCs can raise the bar for the domestic firms. If US
companies were not across Latin America and Asia, there would not be any driving
force to cause domestic companies to change. When P&G enters a country, we
enforce all our environmental and worker safety standards across the board, and
frankly some our plants in China outperform what you find in the US and Europe
some times. |
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| So even if the government does not have an environmental
law, you enforce your own standards? |
| In the vast majority of the cases, even the least developed
countries have the laws, but they are never enforced. Two things drive us. One
is sovereign law. Because whatever is on the books, is all that can ever be
enforced. It is hard to make an argument to the local manager that he ought to
implement something more stringent than his competitor, but as long as it is on
the books, we follow it. It is the law. Second, we implement established good
practice such as spill protection, prevention of water contamination etc. in
very specific cases where we have operation practices. Health and safety worker
protection is exactly the same for all our operations around the world to the
degree that in some cases, we have spent much more then we had to by local law
to protect workers from enzymes, etc. This you could never defend on an economic
basis because labor is cheaper. It is a combination of P&G best practice,
plus you obey the law, period. |
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| When one reads the discussions about corporate social
responsibility, one wonders how far the responsibility of corporations should
go. According to Corpwatch, recently farmers
and workers who grow coffee beans in regions from South America to Vietnam were
faced with the lowest prices in years, prices that did not cover their costs,
and farmers were slipping into dire poverty, pulling their children out of
school, unable to afford medicine and struggling to eat. According to Corpwatch,
their coffee farming practices were also destroying rainforest ecosystems. Are
the unsustainable production practices of these farmers your responsibility?
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| We have 100,000 suppliers around the world. We cannot audit
every single supplier, but we expect them to obey the law, pay minimum wage,
etc. and we have an internal assessment system for managers in local plants to
assess them –we teach them what to look for – for example - "do you have
suspicions about the age of people working there?" This is very subjective.
People look young in some places. Anything they put a check-mark next to will
get a follow-up investigation. We do not claim to be perfect with 100,000
suppliers around the world, but whatever we find internally, we will investigate
it. A lot of the supply chain issues –basic human rights and worker rights –this
will solve itself pretty quickly. Ten years from now these will be non-issues. I
say that having managed environment for several years; in environment the
biggest stumbling block is the big capital expense. Basic rights are not, they
are an operating expense, and at a minimum they can be re-negotiated in the next
round of negotiation with the supplier. That being said, our responsibility ends
with the suppliers we have a direct relationship with. It is not infinite. The
coffee farmers are 2-3 times removed, they sell to coops, that sell to a large
broker, so there are several stages in there. However, this subject of the
plight of the coffee farmers is a sign of a crisis in the coffee industry; the
problem comes from over-supply. Some people in the world are making money off of
coffee and are doing very well. The Brazilians are doing just fine. Central
Americans happen to be the high cost producers and they are the once being most
impacted. |
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| On the price issue; you agreed to pay a higher price for
some of your coffee? |
| Yes, we agreed to 3 executions of our millstone brand. We
started out doing internet sales seeing if we could target the very small
population that buys fair
trade products. In September we began to launch these products in the
stores. That being said, those high priced coffees are always going to be a
minuscule niche in the market. We do need other ways. |
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| Is it really fair trade if you artificially pay a higher
price then what supply and demand dictate? Unless you are a monopoly buyer, that
is, and one could say you have a responsibility to set a price floor? |
| You are right. No, it is not fair trade, and it does not
sell either. If the value is not perceived by the consumer, the problem is much
bigThe requested resource (/editor/default/) is not availableger then the fair trade concept will ever address. With regard to us being a
monopoly buyer; the bulk of the world’s coffee is bought by a few buyers, but
the real problem is the fact that there is about 20-30% too much coffee in the
world. So there is plenty of coffee out there sitting in silos, and as long as
there is that discrepancy between supply and demand, monopoly or not, the prices
will be low. |
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| Recently a group of your shareholders stated that P&G
is not doing enough to protect shareholder value from the impact of the HIV/AIDS
pandemic. From their point of view P&G faces financial exposure due to
employees, suppliers, distributors and customers exposure to HIV/AIDS.
You mention in your Sustainability Report that AIDS has not had a significant
impact on the economics of P&Gs global business because none of your major
markets are located in areas with high incidences –as you strive to reach your
goals above, will this not become a more important issue for you? |
| We have not seen any big impact on our supply chains. We
have a small presence in Africa, so from an employee perspective it has not been
a big problem. However, more and more people are talking to us about the
synergies between our water product and HIV/AIDS because of the large amount of
water people need to drink when taking their drugs. I don’t want to say it is a
positive, but if we are able to develop things that will change the quality of
people’s lives, it does not have to be a negative to us. And the way we think
about sustainable development is better quality of life for everyone now and for
generations to come –“how is it that your business is creating a better life for
your consumers and your employees?” is the way we think about sustainability
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| The conference we have just attended is titled “Eradicating Poverty through
Profit.” It seems to be a rather presumptuous title; is it really possible
to eradicate poverty through profit? |
If you eradicate poverty, it will be because of the market
systems that make it in everybody’s self interest. Everything you turn around
and see [in the United States] is brought to you by profit-making industry. The
quality of life that we get here comes to us through the market place. The
markets don’t work in the least developed countries.
I want to emphasis
again the issue of governance. Every year, the Wall Street Journal and the
Heritage Foundation publish the Economic
Freedom Index. It is all about good governance. They plot every country in
the world, and there is a perfect curve between governance and economic
performance...if governments don’t play their role in creating the foundation of
good governance, I don’t think we can create the market solution.
Two
other observations from this conference if I may; profit was not a dirty word.
And it is in many UN forums and others with campaigning NGOs. They seem to be
almost afraid of a relationship with business, and profit is dirty somehow. The
other thing that struck me is, if we succeed in bringing the least developed
countries out of poverty, and you look back in history, I think you will find
that there was a very unique relationship that developed between the private
sector, NGOs and national governments that made it all possible. I am not sure
how much the UN plays a role in that though...
Back to your question - I
think…, yeah, it can. And somebody will break the code. It may not be one of the
US multinationals, it may be a large conglomerate in India or something, I hope
it is us, but somebody will. |
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Do you agree or disagree with Mr. Carpenter?
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