International Mktg case summary

PART SIX

cases 4 DEVELOPING GLOBAL MARKETING STRATEGIES

OUTLINE OF CASES

4-1 Tambrands—Overcoming Cultural Resistance

4-2 Iberia Airlines Builds a BATNA

4-3 Sales Negotiations Abroad for MRI Systems

4-4 National Office Machines—Motivating Japanese Salespeople: Straight Salary or Commission?

4-5 AIDS, Condoms, and Carnival

4-6 Making Socially Responsible and Ethical Marketing Decisions: Selling Tobacco to Third World Countries

4-7 The Obstacles to Introducing a New Product into a New Market

4-8 Mary Kay in India

4-9 Adidas Battles Allegations of Shirking Responsibility to Workers

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Tambrands—Overcoming Cultural Resistance

CASE 4-1

Tampax, Tambrands’s only product, is the best-selling tampon in the world, with 44 percent of the global market. North America and E urope account for 90 percent of those sales. Company earnings dropped 12 percent to $82.8 million on revenues of $662 million. Stakes are high for Tambrands because tampons are basically all it sells, and in the United States, which currently generates 45  percent of Tanbrands’s sales, the company is mired in competition with such ri vals as Playtex Products and Kimberly-Clark. What’s more, new users are hard to get because 70 percent of women already use tampons. In the overseas market, Tambrands officials talk glowingly of a huge opportunity. Only 100 million of the 1.7 billion eligible women in the world currently use tampons. In planning for expan- sion into a global market, Tambrands divided the world into three clusters, based not on geography but on how resistant women are to using tampons. The goal is to market to each cluster in a similar way. Most women in Cluster 1, including the United States, the United Kingdom, and Australia, already use tampons and may feel they know all they need to know about the product. In Cluster 2, which includes countries such as France, Israel, and South Africa, about 50 percent of women use tampons. Some concerns about virginity remain, and tampons are often considered unnatural products that block the flow. Tambrands enlists gynecologists’ endorsements to stress scientific research on tampons. Potentially the most lucra- tive group—but infinitely more challenging—is Cluster 3, which includes countries like Brazil, China, and Russia. There, along with tackling the virginity issue, Tambrands must also tell women how to use a tampon without making them feel uneasy. While the adver- tising messages differ widely from country to country, Tambrands is also trying to create a more consistent image for its Tampax tampons. The ads in each country show consecutive shots of women standing outside declaring the tampon message, some clutching a blue box of Tampax. They end with the same tagline, “Tampax. Women Know.” While marketing consultants say Tambrands’ strat- egy is a step in the right direction, some caution that tampons are one of the most difficult products to market worldwide.

GLOBAL EXPANSION “The greatest challenge in the global expansion of tampons is to address the religious and cultural mores that suggest that insertion is fundamentally prohibited by culture,” says the managing direc- tor of a consulting company. “The third market [Cluster 3] looks like the great frontier of tampons, but it could be the seductive noose of the global expansion objective.” The company’s new global campaign for Tambrands is a big shift from most feminine protection product ads, which often show frisky women dressed in white pants biking or turning cartwheels, while discreetly pushing messages of comfort. The new campaign features local women talking frankly about what had been a taboo subject in many countries. A recent Brazilian ad shows a close-up of a tampon while the narrator chirps, “It’s sleek, smooth, and really comfortable to use.” For years Tambrands has faced a delicate hurdle selling Tampax tampons in Brazil because many young women fear they’ll lose

their virginity if they use a tampon. When they go to the beach in tiny bikinis, tampons aren’t their choice. Instead, hordes of women use pads and gingerly wrap a sweater around their waist. Now, the number 1 tampon maker hopes a bold new ad campaign will help change the mindset of Brazilian women. “Of course, you’re not going to lose your virginity,” reassures one cheerful Brazilian woman in a new television ad. Tambrands’s risky new ads are just part of a high-stakes campaign to expand into overseas markets where it has long faced cultural and religious sensitivities. The new ads feature local women being surprisingly blunt about such a per- sonal product. In China, another challenging market for Tambrands, a new ad shows a Chinese woman inserting a tampon into a test tube filled with blue water. “No worries about leakage,” declares another. “In any country, there are boundaries of acceptable talk. We want to go just to the left of that,” says the creative director of the New York advertising agency that is creating Tambrands’s $65 million ad campaign worldwide. “We want them to think they have not heard frankness like this before.” The agency planned to launch new Tampax ads in 26 foreign countries and the United States. However, being a single-product company, it is a risky proposition for Tambrands to engage in a global campaign and to build a global distribution network all at the same time. Tam- brands concluded that the company could not continue to be prof- itable if its major market was the United States and that to launch a global marketing program was too risky to do alone.

PROCTER & GAMBLE ACQUIRES TAMBRANDS The company approached Procter & Gamble about a buyout, and the two announced a $1.85 billion deal. The move puts P&G back in the tampon business for the first time since its Rely brand was pulled in 1980 after two dozen women who used tampons died from toxic shock syndrome. Procter & Gamble plans to sell Tampax as a complement to its existing feminine-hygiene products, particu- larly in Asia and Latin America. Known for its innovation in such mundane daily goods as disposable diapers and detergent, P&G has grown in recent years by acquiring products and marketing them internationally. “Becoming part of P&G—a world-class company with global marketing and distribution capabilities—will acceler- ate the global growth of Tampax and enable the brand to achieve its full potential. This will allow us to take the expertise we’ve gained in the feminine protection business and apply it to a new market with Tampax.” Market analysts applauded the deal. “P&G has the worldwide distribution that Tampax so desperately needs,” said a stock market analyst. “Tambrands didn’t have the infrastructure to tap into growth in the developing countries and P&G does.”

P&G CREATES A GLOBAL MODEL Despite the early promise that Brazil seemed to offer with its beach culture and mostly urban population, P&G abandoned Tambrands’s marketing efforts there as too expensive and slow- growing. Instead, it set out to build a marketing model that it could

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Cases 4 Developing Global Marketing Strategies

export to the rest of the globe. P&G began studying cities in Mexico and chose Monterrey, an industrial hub of 4 million people—with 1.2 million women as its target customers—as a prime test spot. Research and focus groups of Mexican women in Monterrey resulted in a new marketing approach based on education. “Everywhere we go, women say ‘this is not for senoritas,’ ” says Silvia Davila, P&G’s marketing director for Tampax Latin America. They’re using the Spanish word for unmarried women as a modest expression for young virgins. This concern crops up in countries that are predominantly Catholic, executives say. In Italy, for instance, just 4 percent of women use tampons. P&G is finding that in countries where school health education is limited, that con- cept is difficult to overcome. P&G marketers say they often find open boxes of tampons in stores—a sign, P&G says, that women were curious about the product but unsure as to how it worked. Hanging out in blue jeans and tank tops and sipping Diet Pepsi on a recent afternoon, Sandra Trevino and her friends seem very much in tune with American culture. But the young women are get- ting a lesson in Trevino’s living room on how to use a product that is commonplace in the United States—and is a mystery to them. “We’re giving you the opportunity to live differently ‘those days’ of the month,” Karla Romero tells the group. She holds up a chart of the female body, then passes out samples to the 10 women. Tampons will bring freedom and discretion, Romero says. “For me, it’s the best thing that ever happened.” A few of the women giggle. Romero is on the front lines of a marketing campaign for one of the world’s most in-the-closet products. Procter & Gamble Co. pays Romero to give a primer on tampons in gatherings that resemble Tupperware parties. Romero and other counselors run through a slide show about the stages of puberty. She pours blue liquid through a stand-up model of a woman’s reproductive tract so the girls can see what happens inside their bodies when they have their periods. They see the tampon absorb the blue fluid. Romero points to the hymen on the model and explains they won’t lose their virginity with a tampon. Still, when Maria brought home a sample from another session a few months ago, “my mother said don’t use them,” she reported. While the 18-year-old can be rebellious—she wears a tiny tank top, heavy blue eye shadow, and three gold studs in each ear—she shares her mother’s doubts. “You can lose your virginity. The norm here is to marry as a virgin,” she says. In addition to in-home demonstrations, counselors in navy pantsuits or doctor’s white coats embroidered with the Tampax logo speak in stores, schools, and gyms—anywhere women gather. One counselor met with 40 late-shift women workers in a cookie factory at midnight. Counselors are taught to approach the subject in a dignified and sensitive manner. For example, they avoid using the word “tampon,” which is too close to the Spanish word tampone, mean- ing plug. P&G calls its product an “internal absorbent” or simply Tampax. Although tampons currently account for just 4 percent of the total Mexican market for feminine-protection products, early results indicate P&G’s investment is paying off. Sales for Tampax tripled in the first 12 months after the new program was launched. Based on the success in Mexico, P&G picked Venezuela to be its next market because it is relatively small—23 million people— and its population are mostly urban. P&G gathered women in Caracas for focus groups where they expressed some cultural simi- larities with their Mexican counterparts, emphasizing the sanctity of virginity. But the tropical weather fostered some promising

differences too. There’s a party culture where women seem com- fortable with their bodies in skimpy skirts and clingy pants. This attitude led P&G marketers to conclude that Tampax advertising could be racier in Venezuela. One slogan, though, mis- fired. On a list of common misconceptions, headed by “will I lose my virginity?” P&G wrote, “La ignorancia es la madre de todo los mitos,” which translates as “ignorance is the mother of all myths.” Focus groups were offended: “In a Latin culture, ignorance and mother don’t go together.” The title was scrapped. In the end, they unveiled ads like “Es Tiempo De Cambiar Las Reglas,” for billboards, buses, and magazines. The company knows that Venezuelan women will catch the pun: “reglas” is the slang they use for their period, but the ad also translates as “It’s time to change the rules.”

GETTING THE MESSAGE ONLINE P&G has always been an early and aggressive adopter of new media, dating back to radio and television. Continuing in this vein, Procter & Gamble is stepping up its Internet activity to use the Web as a marketing medium. P&G’s idea is to attract consumers to inter- active sites that will be of interest to particular target groups, with the hope of developing deeper relationships with consumers. Its first step was to launch a website for teenage girls with information on puberty and relationships, promoting products such as Clearasil, Sunny Delight, and Tampax. The website, www.beinggirl.com, was designed with the help of an advisory board of teenage girls. This site has been expanded to include an online interactive com- munity for teen girls between 14 and 19 years of age, which urges teenage girls to get the most out of life. The site includes a variety of subjects that interest teen girls, as well as an interactive game that lets girls pick from five available “effortless” boyfriends. Characters range from Mysterious and Arty to Sporty. The chosen boyfriend will send confidence-boosting messages and provide girls with a series of “Effortless Guides” to things like football. If the girl gets bored of her boyfriend, she can dump him using a variety of excuses, such as “It’s not you, its me,” and choose another. As one company source stated, “interactive Web sites have become the number one medium, and boys are the number one topic for teenage girls.” A feature of the site, “urban myths,” discusses many of the con- cerns about the use of tampons and related products. Visit www .beinggirl.co.uk for the British market and www.beinggirl.co.in for a comparable site for India. Hindustan Unilever has a similar campaign built around the Sunsilk Gang of Girls (see www.hul.co.in/brands -in-action/detail/Sunsilk/303990/), including a Facebook page.

PUBLIC HEALTH FOR YOUNG GIRLS In those markets where the Web is not readily available to the target market, a more direct and personal approach entails a health and education emphasis. The P&G brands Always and Tampax have joined forces with HERO, an awareness building and fund- raising initiative of the United Nations Association, to launch the “Protecting Futures” program (www.protectingfutures.com), designed to help give girls in Africa a better chance at an education. Girls living in sub-Saharan Africa often miss up to four days of school each month because they lack the basic necessities of sanitary protection and other resources to manage their periods. According to research, 1 in 10 school-age African girls do not attend school during menstruation or drop out at puberty because of the lack of clean and private sanitation facilities in schools.

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If a girl has no access to protective materials or if the materials she has are unreliable and cause embarrassment, she may be forced to stay at home. This absence of approximately 4 days every four weeks may result in the girl missing 10 to 20 percent of her school days. “Working with HERO, the Protecting Futures is a compre- hensive care program which brings puberty education, a traveling healthcare provider for all the children at these schools, nutritious feeding programs, educational support services, a pad distribution program, and significant construction projects to add restrooms and upgrade the school buildings. Support for this program is part of the P&G corporate cause, Live, Learn, and Thrive which has helped over 50 million children in need.” In addition, Tampax and Always brands help sponsor the HERO Youth Ambassador program (www.beinggirl.com/hero) through their teen-focused website. Twenty-four teens from across the United States were selected to become Youth Ambassadors and travel to Namibia and South Africa to work on the Protecting Futures program. Their personal experiences were documented in a series of webisodes airing on beinggirl.com/hero to help encour- age and empower all teens to become global citizens. All of this effort is done with the idea that better health education and the use of the company’s products will result in fewer days absent from school and, thus, better education for female students.

QUESTIONS 1. Evaluate the wisdom of Tambrands becoming part of

Procter & Gamble. 2. Tambrands indicated that the goal of its global advertising

plan was to “market to each cluster in a similar way.” Discuss this goal. Should P&G continue with Tambrands’s original goal adapted to the new educational program? Why? Why not?

3. For each of the three clusters identified by Tambrands, identify the cultural resistance that must be overcome. Suggest possible approaches to overcoming the resistance you identify.

4. In reference to the approaches you identified in Question 3, is there an approach that can be used to reach the goal of “mar- keting to each cluster in a similar way”?

5. P&G is marketing in Venezuela with its “Mexican” model. Should the company reopen the Brazilian market with the same model? Discuss.

6. A critic of the “Protecting Futures” program comments, “If you believe the makers of Tampax tampons, there’s a direct link between using Western feminine protection and achiev- ing higher education, good health, clean water and longer life.” Comment.

Sources: Yumiko Ono, “Tambrands Ads Aim to Overcome Cultural and Religious Obstacles,” The Wall Street Journal, March 17, 1997, p. B8; Sharon Walsh, “Procter & Gamble Bids to Acquire Tambrands; Deal Could Expand Global Sales of Tampax,” The Washington Post, April 10, 1997, p. C01; Ed Shelton, “P&G to Seek Web Friends,” The European, November 16, 1998, p. 18; Emily Nelson and Miriam Jordan, “Sensitive Export: Seeking New Markets for Tampons, P&G Faces Cultural Barriers,” The Wall Street Journal, December 8, 2000, p. A1; Weekend Edition Sunday (NPR), March 12, 2000; “It’s Hard to Market the Unmentionable,” Market- ing Week, March 13, 2002, p. 19; Richard Weiner, “A Candid Look at Menstrual Products— Advertising and Public Relations,” Public Relations Quarterly, Summer 2004; “Procter & Gamble and Warner Bros. Pictures Announce ‘Sisterhood’ between New Movie and Popular Teen Web Site,” PR Newswire, June 1, 2005; “Tampax Aims to Attract Teens With New ‘Effortless’ Message,” Revolution (London), May 2006; “It’s Back; Dotcom Funding Has Jumped 10 Times to $166 Million,” Business Today, May 2006; “Emerging Markets Force San Pro Makers to Re-examine Priorities,” Euromonitor International, November 2007; “Tampax and Always Launch Protect- ing Futures Program Dedicated to Helping African Girls Stay in School,” USA, Discussion Lounge, Africa, December 4, 2007; “Can Tampons Be Cool?” Slate, http://www.Slate.com, January 15; 2007; “Where Food, Water Is a Luxury, Tampons Are Low on Priorities,” Winnipeg Free Press, February 10, 2008.

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CASE 4-2 Iberia Airlines Builds a BATNA

MADRID—One day last April, two model airplanes landed in the offices of Iberia Airlines. They weren’t toys. The Spanish carrier was shopping for new jetliners, and the models were calling cards from Boeing Co. and Airbus, the world’s only two producers of big commercial aircraft. It was the first encounter in what would become a months-long dogfight between the two aviation titans—and Iberia was planning to clean up. Airbus and Boeing may own the jetliner market, with projected sales of more than $1 trillion in the next 20 years, but right now they don’t control it. The crisis in the air-travel industry makes the two manufacturers desperate to nail down orders. So they have grown increasingly dependent on airlines, engine suppliers, and aircraft financiers for convoluted deals. Once the underdog, Airbus has closed the gap from just four years ago—when Boeing built 620 planes to Airbus’s 294—and this year the European plane maker expects to overtake its U.S. rival. For Boeing, Iberia was a chance to stem the tide. For Airbus, Iberia was crucial turf to defend. Iberia and a few other airlines are financially healthy enough to be able to order new planes these days, and they are all driving hard bargains. Enrique Dupuy de Lome, Iberia’s chief financial officer and the man who led its search for widebody jets, meant from the start to run a real horse race. “Everything has been struc- tured to maintain tension up to the last 15 minutes,” he said. Throughout the competition, the participants at Iberia, Boeing, and Airbus gave The Wall Street Journal detailed briefings on the pitches, meetings, and deliberations. The result is a rarity for the secretive world of aircraft orders: an inside look at an all-out sales derby with globetrotting executives, huge price tags, and tortuous negotiations over everything from seats to maintenance and cabin- noise levels. The rivals’ offers were so close that on the final day of haggling, Iberia stood ready with multiple press releases and extracted last-minute concessions in a phone call between the airline’s chair and the winning bidder. By that point, both suitors felt like they’d been through the wringer. “With 200 airlines and only two plane makers, you’d think we’d get a little more respect,” said John Leahy, Airbus’s top salesman. Airbus, a division of European Aeronautic Defense & Space Co., reckoned it had a big edge. It had sold Iberia more than 100 planes since 1997. Leahy thought last summer that he might even bag the contract with minimal competition. In June he had clinched a separate deal with Iberia for three new Airbus A340 widebodies. But Dupuy made Leahy fight for the order—and so enticed Boeing to compete more aggressively. Then, “just to make things interesting,” Dupuy said, he upped the pressure by going shopping for secondhand airplanes. These are spilling onto the market at cut-rate prices as the airline industry’s problems force carriers to ground older jets with their higher operating costs. Iberia is one of the industry’s few highly profitable carriers, thanks to a thorough restructuring before the national carrier was privatized in early 2001. The world’s number 18 in passenger traf- fic, with a fleet of 145 planes, it has benefited by flying few routes

to North America, where air travel is in tatters, and by dominating the large Latin American market. The Spanish carrier was looking to replace six Boeing 747-200 jumbo jets more than 20 years old. It wanted as many as 12 new planes to complete a 10-year modernization program for Iberia’s long-haul fleet. Based on list prices, the 12-plane order was valued at more than $2 billion. Iberia’s Dupuy, a soft-spoken career finance man, first needed to woo Boeing to the table. The U.S. producer had last sold Iberia planes in 1995, and since then, the carrier had bought so many Airbus jets that Boeing considered not even competing. But in late July, Dupuy met Toby Bright, Boeing’s top salesman for jets. Over dinner in London, according to both men, Dupuy told Bright that Iberia truly wanted two suppliers, not just Airbus. The Boeing sales chief was skeptical, and he recalled think- ing at the time, “You’re running out of ways to show us.” Having worked as Boeing’s chief salesman in Europe, Airbus’s home turf, he had heard similar lines from customers who eventually bought Airbus planes. So he wondered: “Are we being brought in as a stalking horse?” Yet replacing Iberia’s old 747s with new 777s would be Boeing’s last chance for years to win back Iberia. The argument against Boeing was that an all-Airbus fleet would make Iberia’s operations simpler and cheaper. Still, going all-Airbus might weaken Iberia’s hand in future deals. Airbus would know that the carrier’s cost of switching to Boeing would require big investments in parts and pilot training. In early November, Airbus and Boeing presented initial bids on their latest planes. The four-engine Airbus A340-600 is the longest plane ever built. Boeing’s 777-300ER is the biggest twin- engine plane. The new A340 can fly a bit farther and has more lifting power than the 777. The new Boeing plane is lighter, holds more seats and burns less fuel. The Boeing plane, with a catalog price around $215 million, lists for some $25 million more than the A340. Dupuy, whose conference room is decorated with framed awards for innovative aircraft-financing deals, set his own tough terms on price and performance issues including fuel consump- tion, reliability, and resale value. He wouldn’t divulge prices, but people in the aviation market familiar with the deal say he demanded discounts exceeding 40 percent. As negotiations began, Dupuy told both companies his rule: Whoever hits its target, wins the order. The race was on. Bright, who had been appointed Boeing’s top airplane sales- person in January 2002, pitched the Boeing 777 as a “revenue machine.” He insisted that his plane could earn Iberia about $8,000 more per flight than the A340-600 because it can hold more seats and is cheaper to operate. A burly 50-year-old West Virginian, Bright joined Boeing out of college as an aerospace designer. He knew the new Airbus would slot easily into Iberia’s fleet. But he also felt that Dupuy’s target price undervalued his plane. At Airbus, Leahy also fumed at Iberia’s pricing demands. A New York City native and the company’s highest-ranking American, he pursues one goal: global domination over Boeing. Last year he spent 220 days on sales trips.

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To Iberia, he argued that his plane offered a better investment return because the A340 is less expensive to buy and is similar to Iberia’s other Airbus planes. From a hodge-podge of 11 models in 1997, Iberia now flies five types, and replacing the old 747s with A340s would trim that to four—offering savings on parts, mainte- nance, and pilot training. Even before presenting Airbus’s offer, Leahy had flown to Madrid in October to make his case. On November 18, he once again took a chartered plane for the one-hour flight from Airbus headquarters in Toulouse, France, to Madrid. For two hours that evening, he and his team sat with Dupuy and other Iberia manag- ers around a table in Dupuy’s office, debating how many seats can fit on a 777. Those numbers were crucial to the deal because each seat represents millions of dollars in revenue over the life of a plane and also adds weight and cost. Boeing had told Iberia that its 777 could hold 30 more seats than the 350 Iberia planned to put on the Airbus plane. Leahy argued that the Boeing carries at most five more seats. “Get guar- antees from Boeing” on the seat count, Leahy prodded the Iberia managers. At Boeing, Bright was eager to soften Iberia’s pricing demand. His account manager, Steve Aliment, had already made several visits to pitch the plane, and in late November, Bright sent him once again to protest that Iberia didn’t appreciate the 777’s revenue potential. Boeing desperately wanted to avoid competing just on price, so Bright pushed operating cost and comfort. On the Airbus side, Leahy also was feeling pressured because a past sales tactic was coming back to haunt him. In 1995, when Iberia was buying 18 smaller A340s and Dupuy expressed concern about their future value, Leahy helped seal the deal by guaran- teeing him a minimum resale price, which kicks in after 2005. If Iberia wants to sell them, Airbus must cover any difference between the market price of the used planes and the guaranteed floor price. The guarantee is one of the tools that Leahy has used to boost Airbus’s share of world sales to about 50 percent today from 20 percent in 1995. Boeing rarely guarantees resale values. Dupuy had wanted guarantees because they lower his risk of buying and thus cut his cost of borrowing. What mattered now was that the guarantees also freed him to sell the planes at a good price. Early in the competition, he suggested to both Airbus and Boeing that he might eventually replace all of Iberia’s A340s with Boeings—and potentially stick Airbus with most of the tab. “If we didn’t have the guarantees, the position of Airbus would be very strong,” Dupuy said in an interview. Instead, “we have a powerful bargaining tool on future prices.” On December 4, Leahy flew again to Madrid to try to persuade Iberia to close a deal by year’s end. Running through a presenta- tion in Dupuy’s office, Leahy and five colleagues ticked off fuel and maintenance costs for their plane. They asserted that passen- gers prefer the plane because it is quieter than the 777 and has no middle seats in business class. Dupuy then rattled Leahy’s cage with a new scenario: Iberia managers would be flying off next week to look at used Boeing 747-400 jumbo jets. Singapore Airlines had stopped flying the planes and was offering to lease them at bargain prices. Leahy chided Dupuy, saying that was “like buying a used car,” where a bargain can easily backfire. Dupuy replied that sometimes buying used makes sense because it offers the flexibility of other options. The message: Iberia could dump its Airbus fleet.

Within Iberia, another debate was ending. Dupuy heard from his managers the results of a yearlong analysis of the rival planes. The Airbus was cheaper than the Boeing, and the A340’s four engines help it operate better in some high-altitude Latin American airports. But Iberia managers had decided they could fit 24 more seats on the Boeing, boosting revenue. And Iberia engineers calculated that the 777 would cost 8 percent less to maintain than the A340. Maintenance on big planes costs at least $3 million a year, so the savings would be huge over the life of a fleet. Unaware of Iberia’s analysis, the Boeing team arrived in Dupuy’s office on the morning of December 11 with three bound selling documents. One contained Boeing’s revised offer, titled “Imagine the Possibilities . . . Iberia’s 777 Fleet.” Knowing Dupuy as a numbers guy, the Boeing team peppered him with data show- ing passengers would choose Iberia because they prefer the 777. Dupuy told the salespeople their price was still too high. By mid-December, Iberia chairman Xabier de Irala was get- ting impatient and wanted a decision by the end of the year. On December 18, Boeing’s Bright flew to Madrid. Over a long lunch, Dupuy reiterated his price target. “If that’s your number, let’s give this up,” Bright said. Talks continued cordially, but the men left doubtful they could close the gap. That Friday, December 20, Dupuy told Iberia’s board that prices from Airbus and Boeing were still too high, and he would push the used-plane option harder. By the start of the year, Airbus’s Leahy, growing frustrated, arranged a Saturday meeting with Dupuy. On January 4, the Iberia executive interrupted a family skiing holiday in the Pyrenees and drove two hours along winding French roads to meet Leahy for lunch. Leahy spent four hours trying to convince Dupuy and a colleague that Airbus couldn’t offer a better deal. Dupuy argued that Airbus had just given steep discounts to British airline easyJet, so it should do the same for Iberia. Annoyed, Leahy said media reports of a 50 percent price cut for easyJet were nonsense. “You get Boeing to give you a 50 percent discount and I’ll send you a bottle of champagne,” he told the Iberia executives. Bright was frustrated too. In the first week of January, Dupuy proposed visiting Seattle, where Boeing builds passenger planes. Bright’s reply: If Iberia was unwilling to budge, there was little reason to come. So when Dupuy said he would make the 14-hour journey, Bright was encouraged. On January 14, Dupuy and two colleagues arrived in Seattle. In the private dining room of Cascadia, a high-end downtown restaurant, they met for dinner with the Boeing salespeople and Alan Mulally, the chief executive of Boeing’s commercial-plane division. Dupuy was impressed by Mulally’s eagerness and was pleased when he urged Bright’s team to find a way to close the gap. The next day, the Boeing salesmen offered a new proposal— including a slightly lower price, improved financing and better terms on spare parts, crew training, and maintenance support from General Electric Co., the maker of the plane’s engines. When Dupuy left Seattle on January 16, Bright felt Iberia was relenting a bit on price and that Dupuy wanted to “find a way to do the deal.” Dupuy was also optimistic about striking a deal with Boeing. Back in Madrid the next day, he raced off to join Iberia’s chairman Irala for a meeting with Leahy and Airbus President Noel Forgeard. Irala, a bear of a man who is credited with saving Iberia from bankruptcy eight years ago, told the Airbus execu- tives that Dupuy’s price target remained firm. When the Airbus men relented on a few points, Irala yielded a bit too and spelled

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Cases 4 Developing Global Marketing Strategies

out Iberia’s remaining targets for Airbus. Forgeard said a deal looked possible. As the meeting broke up, Dupuy was pleased. He felt that Boeing and Airbus were digging deep. And no wonder. The world air-travel market was sinking deeper, and fears of war in Iraq and terrorism had slashed global bookings. In the next few days, the sales teams from Boeing and Airbus each huddled to refine their offers. Both remained about 10 percent above Dupuy’s price targets. Each called him several times daily, pushing for concessions. Dupuy didn’t budge. On January  23, he  told Iberia’s board that both companies could do better. The board scheduled a special meeting for the following Thursday, January 30. Energized by the Seattle meetings, Bright pushed his team “to go all out to win this bid,” and they worked around the clock. Bright phoned Dupuy daily from Seattle and occasionally fielded his calls at 3:00 a.m., Pacific time. By late January, Boeing had cut its price by more than 10 percent after haggling over engine price with GE and financing with leasing firms. The 777 was now less than 3 percent above Dupuy’s target—so close that Mr. Bright asked for a gesture of compromise from Iberia. Dupuy was impressed by Boeing’s new aggressiveness. But Airbus was also closing the gap so quickly, he said, that he could offer no concessions. To Leahy, he talked up Boeing’s willingness to deal. “I was just talking to Toby . . .,” Dupuy told Leahy dur- ing several conversations, referring to Bright. Airbus improved its offer further. On Wednesday, the day before the deadline, Boeing and Airbus were running about even. In Seattle, Bright threw some clothes in his briefcase and proposed to Dupuy that he hop on a plane to Madrid. Dupuy said the choice was his, but what really mattered was the price target. That day, Dupuy told Bright and Leahy that their bosses should call Irala with any final improvements before the board meeting. On Thursday morning, Bright offered to trim Boeing’s price further if Dupuy could guarantee that Boeing would win the deal. “I can’t control Forgeard,” Dupuy replied, referring to the Airbus president, who was due to talk soon with Irala. Bright made the price cut without the concession. “You’re very close,” Dupuy told him. Later, Forgeard got on the phone with Iberia’s Irala, who said he still needed two concessions on the financial terms and

economics of the deal. Airbus had already agreed to most of Dupuy’s terms on asset guarantees and, with engine maker Rolls-Royce PLC, agreed to limit Iberia’s cost of maintaining the jets. Forgeard asked if relenting would guarantee Airbus the deal. Irala replied yes, pending board approval—and looked over with a grin at Dupuy, who sat nearby with his laptop open. Forgeard acquiesced. Dupuy plugged the new numbers in his spreadsheet. Airbus had hit its target. That evening, Boeing got a call from Iberia saying the airline would soon announce it had agreed to buy nine A340-600s and taken options to buy three more. Hours later, Boeing posted on its website a statement criticizing Iberia’s choice as “the easiest decision.” Bright said later that he simply couldn’t hit Dupuy’s numbers and “do good business.” In the end, Airbus nosed ahead thanks to its planes’ lower price and common design with the rest of Iberia’s fleet. By offering guarantees on the planes’ future value and maintenance costs, plus attractive financing terms, Airbus edged out Boeing’s aggressive package. The deal’s final financial terms remain secret. At Airbus, Leahy was relieved, but he faced one last slap. Iberia’s news release crowed about Airbus’s price guarantees on the planes—a detail Leahy considered confidential. Iberia’s Dupuy said he wasn’t rubbing it in. But he had, he boasted, won “extraordinary conditions.”

QUESTIONS 1. Critique the negotiation strategies and tactics of all three key

executives involved: Dupuy, Leahy, and Bright. 2. Critique the overall marketing strategies of the two aircraft

makers as demonstrated in this case. 3. What were the key factors that ultimately sent the order in

Airbus’s direction? 4. Assume that Iberia again is on the market for jet liners. How

should Bright handle a new inquiry? Be explicit.

Source: Daniel Michaels, “Boeing and Airbus in Dogfight to Meet Stringent Terms of Iberia’s Executives,” The Wall Street Journal Europe, March 10, 2003, p. A1. Copyright 2003 by Dow Jones & Co. Inc. Reproduced with permission of Dow Jones & Co. Inc. via Copyright Clearance Center.

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CASE 4-3 Sales Negotiations Abroad for MRI Systems

International sales of General Medical’s Magnetic Resonance Imaging (MRI) systems have really taken off in recent months. Your representatives are about to conclude important sales con- tracts with customers in both Tokyo and Rio de Janeiro. Both sets of negotiations require your participation, particularly as final details are worked out. The bids you approved for both customers are identical (see Exhibits 1 and 2). Indeed, both customers had contacted you originally at a medical equipment trade show in Las Vegas, and you had all talked business together over drinks at the conference hotel. You expect your two new customers will be talking together again over the Internet about your products and prices as they had in Las Vegas. The Japanese orders are potentially larger because the doctor you met works in a hospital that has nine other units in the Tokyo/Yokohama area. The Brazilian doctor represents a very large hospital in Rio, which may require more than one unit. Your travel arrangements are now being made. Your local representatives will fill you in on the details. Best of luck!

[Note: Your professor will provide you with additional material that you will need to complete this case.]

Exhibit 1 Price Quotation

Deep Vision 2000 MRI (basic unit) $1,200,000 Product options •   2D and 3D time-of-flight (TOF) 

angiography for capturing fast flow 150,000 •   Flow analysis for quantification 

of cardiovascular studies 70,000 •  X2001 software package 20,000

Service contract (2 years normal maintenance, parts, and labor) 60,000 Total price $1,500,000

Exhibit 2 Standard Terms and Conditions

Delivery 6 months

Penalty for late delivery $10,000/month Cancellation charges 10% of contract price Warranty (for defective machinery)

parts, one year

Terms of payment COD

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CASE 4-4 National Office Machines—Motivating Japanese Salespeople: Straight Salary or Commission?

National Office Machines of Dayton, Ohio, manufacturer of cash registers, electronic data processing equipment, adding machines, and other small office equipment, recently entered into a joint venture with Nippon Cash Machines of Tokyo, Japan. Last year, National Office Machines (NOM) had domestic sales of over $1.4 billion and foreign sales of nearly $700 million. In addition to the United States, it operates in most of western Europe, the Mideast, and some parts of the Far East. In the past, it had no significant sales or sales force in Japan, though the company was represented there by a small trading company until a few years ago. In the United States, NOM is one of the leaders in the field and is consid- ered to have one of the most successful and aggressive sales forces found in this highly competitive industry. Nippon Cash Machines (NCM) is an old-line cash register manufacturing company organized in 1882. At one time, Nippon was the major manufacturer of cash register equipment in Japan, but it has been losing ground since 1970 even though it produces perhaps the best cash register in Japan. Last year’s sales were 9 billion yen, a 15 percent decrease from sales the prior year. The fact that it produces only cash registers is one of the major prob- lems; the merger with NOM will give it much-needed breadth in product offerings. Another hoped-for strength to be gained from the joint venture is managerial leadership, which is sorely needed. Fourteen Japanese companies have products that compete with Nippon; other competitors include several foreign giants such as IBM, National Cash Register, and Unisys of the United States, and Sweda Machines of Sweden. Nippon has a small sales force of 21 people, most of whom have been with the company their entire adult careers. These salespeople have been responsible for selling to Japanese trad- ing companies and to a few larger purchasers of equipment. Part of the joint venture agreement included doubling the sales force within a year, with NOM responsible for hiring and train- ing the new salespeople, who must all be young, college-trained Japanese nationals. The agreement also allowed for U.S. personnel in supervisory positions for an indeterminate period of time and for retaining the current Nippon sales force. One of the many sales management problems facing the Nippon/American Business Machines Corporation (NABMC, the name of the new joint venture) was which sales compensation plan to use. That is, should it follow the Japanese tradition of straight salary and guaranteed employment with no individual incentive program, or the U.S. method (very successful for NOM in the United States) of commissions and various incentives based on sales performance, with the ultimate threat of being fired if sales quotas go continuously unfilled? The immediate response to the problem might well be one of using the tried-and-true U.S. compensation methods, since they have worked so well in the United States and are perhaps the kind of changes needed and expected from U.S. management. NOM management is convinced that salespeople selling its kinds of products in a competitive market must have strong incentives to produce. In fact, NOM had experimented on a limited basis in the United States with straight salary about ten years ago, and it was a

bomb. Unfortunately, the problem is considerably more complex than it appears on the surface. One of the facts to be faced by NOM management is the tra- ditional labor–management relations and employment systems in Japan. The roots of the system go back to Japan’s feudal era, when a serf promised a lifetime of service to his lord in exchange for a lifetime of protection. By the start of Japan’s industrial revolution in the 1880s, an unskilled worker pledged to remain with a com- pany all his useful life if the employer would teach him the new mechanical arts. The tradition of spending a lifetime with a single employer survives today mainly because most workers like it that way. The very foundations of Japan’s management system are based on lifetime employment, promotion through seniority, and single- company unions. There is little chance of being fired, pay raises are regular, and there is a strict order of job-protecting seniority. Japanese workers at larger companies still are protected from outright dismissal by union contracts and an industrial tradition that some personnel specialists believe has the force of law. Under this tradition, a worker can be dismissed after an initial trial period only for gross cause, such as theft or some other major infraction. As long as the company remains in business, the worker isn’t discharged, or even furloughed, simply because there isn’t enough work to be done. Besides the guarantee of employment for life, the typical Japanese worker receives many fringe benefits from the company. Bank loans and mortgages are granted to lifetime employees on the assumption that they will never lose their jobs and therefore the ability to repay. Just how paternalistic the typical Japanese firm can be is illustrated by a statement from the Japanese Ministry of Foreign Affairs that gives the example of A, a male worker who is employed in a fairly representative company in Tokyo.

To begin with, A lives in a house provided by his company, and the rent he pays is amazingly low when compared with average city rents. The company pays his daily trips between home and factory. A’s working hours are from 9:00 a.m. to 5:00 p.m. with a break for lunch, which he usually takes in the company restaurant at a very cheap price. He often brings home food, clothing, and other miscellaneous articles he has bought at the company store at a discount ranging from 10  percent to 30 percent below city prices. The company store even supplies furniture, refrigerators, and television sets on an installment basis, for which, if necessary, A can obtain a loan from the company almost free of interest. In case of illness, A is given free medical treatment in the company hospital, and if his indisposition extends over a number of years, the company will continue paying almost his full salary. The company maintains lodges at seaside or mountain resorts where A can spend the holidays or an occasional weekend with the family at moderate prices. . . . It must also be remembered that when A reaches retirement age (usually 55) he will receive a lump-sum retirement allowance or a pension, either of which will assure him a relatively stable living for the rest of his life.

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Part 6 Supplementary Material

Even though A is only an example of a typical employee, a salesperson can expect the same treatment. Job security is such an expected part of everyday life that no attempt is made to moti- vate the Japanese salesperson in the same manner as in the United States; as a consequence, selling traditionally has been primarily an order-taking job. Except for the fact that sales work offers some travel, entry to outside executive offices, the opportunity to enter- tain, and similar side benefits, it provides a young person with little other incentive to surpass basic quotas and drum up new business. The traditional Japanese bonuses are given twice yearly, can be up to 40 percent of base pay, and are no larger for salespeople than any other functional job in the company. As a key executive in a Mitsui-affiliated engineering firm put it recently, “The typical salesman in Japan isn’t required to have any particular talent.” In return for meeting sales quotas, most Japanese salespeople draw a modest monthly salary, sweetened about twice a year by bonuses. Manufacturers of industrial products generally pay no commission or other incentives to boost their businesses. Besides the problem of motivation, a foreign company faces other different customs when trying to put together and manage a sales force. Class systems and the Japanese distribution system, with its penchant for reciprocity, put a strain on the creative talents of the best sales managers, as Simmons, the U.S. bedding manu- facturer, was quick to learn. In the field, Simmons found itself stymied by the bewildering realities of Japanese marketing, especially the traditional distribu- tion system that operates on a philosophy of reciprocity that goes beyond mere business to the core of the Japanese character: A favor of any kind is a debt that must be repaid. To lead another person on in business and then turn against that person is to lose face, abhor- rent to most Japanese. Thus, the owner of large Western-style apart- ments, hotels, or developments buys his beds from the supplier to whom he owes a favor, no matter what the competition offers. In small department and other retail stores, where most items are handled on consignment, the bond with the supplier is even stronger. Consequently, all sales outlets are connected in a compli- cated web that runs from the largest supplier, with a huge national sales force, to the smallest local distributor, with a handful of door- to-door salespeople. The system is self-perpetuating and all but impossible to crack from the outside. However, there is some change in attitude taking place as both workers and companies start discarding traditions for the job mobility common in the United States. Skilled workers are will- ing to bargain on the strength of their experience in an open labor market in an effort to get higher wages or better job opportuni- ties; in the United States, it’s called shopping around. And a few companies are showing a willingness to lure workers away from other concerns. A number of companies are also plotting how to rid themselves of deadwood workers accumulated as a result of promotions by strict seniority. Toyo Rayon company, Japan’s largest producer of synthetic fibers, started reevaluating all its senior employees every five years with the implied threat that those who don’t measure up to the company’s expectations have to accept reassignment and possibly demotion; some may even be asked to resign. A chemical engineer- ing and construction firm asked all its employees over 42 to negoti- ate a new contract with the company every two years. Pay raises and promotions go to those the company wants to keep. For those who think they are worth more than the company is willing to pay, the company offers retirement with something less than the $30,000 lump-sum payment the average Japanese worker receives at age 55.

More Japanese are seeking jobs with foreign firms as the lifetime-employment ethic slowly changes. The head of student placement at Aoyama Gakuin University reports that each year the number of students seeking jobs with foreign companies increases. Bank of America, Japan Motorola, Imperial Chemical Industries, and American Hospital Supply are just a few of the companies that have been successful in attracting Japanese students. Just a few years ago, all Western companies were places to avoid. Even those companies that are successful work with a multitude of handicaps. American companies often lack the intricate web of personal connections that their Japanese counterparts rely on when recruiting. Furthermore, American companies have the reputation for being quick to hire and even quicker to fire, whereas Japanese companies still preach the virtues of lifelong job security. Those U.S. companies that are successful are offering big salaries and prom- ises of Western-style autonomy. According to a recent study, 20- to 29-year-old Japanese prefer an employer-changing environment to a single lifetime employer. They complain that the Japanese system is unfair because promotions are based on age and seniority. A young recruit, no matter how able, has to wait for those above him to be promoted before he too can move up. Some feel that if you are really capable, you are better off working with an American company. Some foreign firms entering Japan have found that their merit- based promotion systems have helped them attract bright young recruits. In fact, a survey done by Nihon Keizai Shimbun, Japan’s leading business newspaper, found that 80 percent of top managers at 450 major Japanese corporations wanted the seniority promo- tion system abolished. But, as one Japanese manager commented, “We see more people changing their jobs now, and we read many articles about companies restructuring, but despite this, we won’t see major changes coming quickly.” A few U.S. companies operating in Japan are experimenting with incentive plans. Marco and Company, a belting manufacturer and Japanese distributor for Power Packing and Seal Company, was persuaded by Power to set up a travel plan incentive for salespeople who topped their regular sales quotas. Unorthodox as the idea was for Japan, Marco went along. The first year, special one-week trips to Far East holiday spots like Hong Kong, Taiwan, Manila, and Macao were inaugurated. Marco’s sales of products jumped 212 percent, and the next year, sales were up an additional 60 percent. IBM also has made a move toward chucking the traditional Japanese sales system (salary plus a bonus but no incentives). For about a year, it has been working with a combination that retains the semiannual bonus while adding commission payments on sales over preset quotas. “It’s difficult to apply a straight commission system in selling computers because of the complexities of the product,” an IBM Japan official said. “Our salesmen don’t get big commissions because other employees would be jealous.” To head off possible ill feeling, therefore, some nonselling IBM employees receive monetary incentives. Most Japanese companies seem reluctant to follow IBM’s example because they have doubts about directing older sales- people to go beyond their usual order-taking role. High-pressure tactics are not well accepted here, and sales channels are often pretty well set by custom and long practice (e.g., a manufacturer normally deals with one trading company, which in turn sells only to customers A, B, C, and D). A salesperson or trading company, for that matter, is not often encouraged to go after customer Z and get it away from a rival supplier. The Japanese market is becoming more competitive and there is real fear on the part of NOM executives that the traditional system

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Cases 4 Developing Global Marketing Strategies

just won’t work in a competitive market. However, the proponents of the incentive system concede that the system really has not been tested over long periods or even adequately in the short term because it has been applied only in a growing market. In other words, was it the incentive system that caused the successes achieved by the companies, or was it market growth? Other companies following the traditional method of compensation and employee relations also have had sales increases during the same period. The problem is further complicated for NABMC because it will have both new and old salespeople. The young Japanese seem eager to accept the incentive method, but older ones are hesitant. How do you satisfy both since you must, by agreement, retain all the sales staff? A study done by the Japanese government on attitudes of youth around the world suggests that younger Japanese may be more receptive to U.S. incentive methods than one would antici- pate. In a study done by the Japanese prime minister’s office, there were some surprising results when Japanese responses were compared with responses of similar-aged youths from other coun- tries. Exhibit 1 summarizes some of the information gathered on life goals. One point that may be of importance in shedding light on the decision NOM has to make is a comparison of Japanese attitudes with young people in 11 other countries—the Japanese young people are less satisfied with their home life, school, and working situations and are more passive in their attitudes toward social and political problems. Furthermore, almost one-third of those employed said they were dissatisfied with their present jobs primarily because of low income and short vacations. Asked if they had to choose between a difficult job with responsibility and

authority or an easy job without responsibility and authority, 64 percent of the Japanese picked the former, somewhat less than the 70 to 80 percent average in other countries. Another critical problem lies with the nonsales employees; traditionally, all employees on the same level are treated equally, whether sales, production, or staff. How do you encourage com- petitive, aggressive salesmanship in a market unfamiliar with such tactics, and how do you compensate salespeople to promote more aggressive selling in the face of tradition-bound practices of pater- nalistic company behavior?

QUESTIONS 1. What should NABMC offer—incentives or straight salary?

Support your answer. 2. If incentives are out, how do you motivate salespeople and

get them to compete aggressively? 3. Design a U.S.-type program for motivation and compensation

of salespeople. Point out where difficulties may be encoun- tered with your plan and how the problems are to be overcome.

4. Design a pay system you think would work, satisfying old salespeople, new salespeople, and other employees.

5. Discuss the idea that perhaps the kind of motivation and aggressiveness found in the United States is not necessary in the Japanese market.

6. Develop some principles of motivation that could be applied by an international marketer in other countries.

Exhibit 1 Life Goals

Japan

U.S.

U.K.

Germany

France

Switzerland

Sweden

Australia

India

Philippines

Brazil

35.4

6.2

11.2

9.0 17.8 60.6 5.5 7.5

7.1 16.4 62.2 10.9 3.4

3.7 9.2 72.3 11.9 3.0

2.51.7 84.8 7.5 3.4

6.7 5.1 76.0 10.5 1.6

22.3

Key: To get rich To acquire social position

To work on behalf of society

To live as I choose

No answer

33.3 16.2 26.3

21.7 9.6 46.2 22.0 0.5

7.7 16.7 63.2 11.9 0.5

13.9 63.4 8.6 2.9

5.1 77.3 9.5 1.8

5.8 41.2

(Unit: %)

6.8 10.8

1.8

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CASE 4-5 AIDS, Condoms, and Carnival

Worldwide, more than 1.8 million people died of AIDS in 2010, and more than 34 million are estimated to be living with HIV/ AIDS. Fortunately, the first number is down from a previous high of more than 2 million in 2009. But the number of infected persons continues to rise.

BRAZIL Half a million Brazilians are infected with the virus that causes acquired immunodeficiency syndrome (AIDS), and millions more are at high risk of contracting the incurable ailment, a federal study reported. The Health Ministry study is Brazil’s first official attempt to seek an estimate of the number of residents infected with human immunodeficiency virus (HIV). Many had doubted the government’s prior number of 94,997. The report by the National Program for Transmissible Diseases/AIDS said 27 million Brazilians are at high risk to contract AIDS, and another 36 million are considered to be at a medium risk. It said Brazil could have 7.5 million AIDS victims in the next decade. “If we are going to combat this epidemic, we have to do it now,” said Pedro Chequer, a Health Ministry official. Chequer said the Health Ministry would spend $300 million next year, distributing medicine and 250 million condoms and bringing AIDS awareness campaigns to the urban slums, where the disease is most rampant. Last month, Brazil became one of the few countries to offer a promising AIDS drug free to those who need it. The drug can cost as much as $12,000 a year per patient. AIDS cases in Brazil have risen so dramatically for married women that the state of São Paulo decided that it must attack a basic cultural practice in Latin America: Their husbands don’t practice safe sex. Last month, the government of Brazil’s mega- lopolis started promoting the newly released female condom. Many of the new AIDS cases in Brazil are married women who have children, according to a report released last month at the Pan-American Conference on AIDS in Lima, Peru. Worldwide, women constitute the fastest-growing group of those diagnosed with HIV. And of the 30.6 million people who are diagnosed with HIV, 90 percent live in poor countries. One Brazilian mother, Rosana Dolores, knows well why women cannot count on male partners to use condoms. She and her late husband never thought of protecting their future children against AIDS. “We were married. We wanted to have kids,” says Dolores, both of whose children were born HIV positive. “These days, I would advise young people to always use condoms. But married couples . . . who is going to?” Brazil, with its 187 million people and the largest population in South America, has the second-highest number of reported HIV infections in the Americas, after the United States, according to a report released by the United Nations agency UNAIDS. Public health officials say one reason why AIDS preven- tion efforts have failed is that many Brazilians just don’t like condoms. Although use in Brazil has quadrupled in the past six years, it is still the least popular method of birth control— a touchy issue in the predominantly Roman Catholic country.

Another reason is that condoms cost about 75 cents each, mak- ing them more expensive here than anywhere else in the world, health officials say. Plus, Latin-style machismo leaves women with little bargaining power. Only 14 percent of Brazilian heterosexual men used con- doms last year, according to AIDSCAP, an AIDS prevention pro- gram funded by the U.S. Agency for International Development. In other studies, many women said they would not ask their partner to use a condom, even if they knew he was sleeping with others. “Women are afraid of asking their men to have safe sex, afraid of getting beaten, afraid of losing their economic support,” says Guido Carlos Levi, a director at the health department at Emilio Ribas Hospital. “This is not Mexico, but we’re quite a machoistic society here.” The frequency with which Latin men stray from monogamous relationships has compounded the problem. In studies conducted in Cuba by the Pan American Health Organization, 49 percent of men and 14 percent of women in stable relationships admitted they had had an affair in the past year. In light of statistics showing AIDS as the number one killer of women of childbearing age in São Paulo state, public health officials launched a campaign promoting the female condom. The hope is that it will help women—especially poor women—protect themselves and their children. But the female condom seemed unlikely to spark a latex revolution when it hit city stores. The price is $2.50 apiece—more than three times the price of most male condoms. The Family Health Association is asking the government to help subsidize the product and to cut the taxes on condoms that make them out of reach for many poor Brazilians. “We’re look- ing for a pragmatic solution to prevent the transmission of HIV- AIDS,” group President Maria Eugenia Lemos Fernandes said. “Studies show there is a high acceptance of this method because it’s a product under the control of women.” While 75 percent of the women and 63 percent of the men in a pilot study on the female condom said they approved of the device, many women with AIDS say they would have been no more likely to have used a female condom than a conventional one. Part of the problem is perception: 80 percent of women and 85 percent of men in Brazil believe they are not at risk of contract- ing HIV, according to a study conducted by the Civil Society for the Well-Being of the Brazilian Family. Also at risk are married women, 40 percent of whom undergo sterilization as an affordable way of getting around the Catholic church’s condemnation of birth control, health officials noted. “It’s mostly married women who are the victims. You just never think it could be you,” says a former hospital administrator who was diagnosed with the virus after her husband had several extramarital affairs. He died two years ago. “I knew everything there was to know about AIDS—I worked in a hospital—but I never suspected he was going out like that. He always denied it,” she says. While HIV is making inroads in rural areas and among teen- agers in Brazil, Fernandes says it doesn’t have to reach epidemic

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Cases 4 Developing Global Marketing Strategies

proportions as in Uganda or Tanzania. “There is a very big win- dow of opportunity here.” Brazil’s Health Ministry has added a new ingredient to the heady mix that makes up the country’s annual Carnival—condoms. The ministry will distribute 10 million condoms next month, along with free advice on how to prevent the spread of AIDS, at places like Rio de Janeiro’s sambadrome, where bare-breasted dancing girls attract millions of spectators every year. “It’s considered as a period of increased sexual activity,” a spokeswoman at the ministry’s AIDS coordination department said on Monday. “The euphoria provoked by Carnival and the excessive consumption of alcohol make it a moment when people are more likely to forget about prevention,” she explained. It is no coincidence that Rio de Janeiro was chosen to host a Conference on HIV Pathogenesis and Treatment. Brazil’s handling of the epidemic is widely regarded as exemplary. In the early 1990s, the World Bank predicted that by 2000, HIV would have infected 1.2 million Brazilians. Five years after that deadline, the total was just half the prediction, at about 600,000. So how did Brazil do it, and can other poor countries learn from what was done? Perhaps the first lesson is don’t be squeamish. Brazil, a predomi- nantly Catholic country, hands out free condoms in abundance. Some 20 million are given away every month—a figure boosted by 50 percent in February to accommodate for the exuberance of the country’s famous carnivals. Drug users, too, are treated sensibly. Those who inject are offered regular supplies of clean needles and, as a result, three-fourths of them claim never to share needles with oth- ers. Nor are prostitutes neglected. Both ladies and gentlemen of the night are the targets of campaigns intended to promote condom use. The second lesson is to treat freely. Brazilian law gives all resi- dents the right to the best available drug treatment at no cost. This is important, because having to pay discourages people from com- plying with the full treatment and thus encourages the emergence of drug-resistant viruses. Providing free treatment is, of course, expensive. This year, the government will spend $395 million on anti-HIV drugs, almost two-thirds of it on three expensive pat- ented drugs. This has brought it into conflict with foreign drug companies. Although it has never actually broken a drug-company patent, the government has exploited every available loophole to evade patents and buy or manufacture generic versions of drugs. For those patents that cannot legally be evaded, the government has played chicken with the patent owners over prices, knowing that manufacturers are desperate to avoid a patent-breaking prec- edent that others might follow. So far, it has been the companies that have blinked, though the latest sparring match, with Abbott Laboratories, an American firm, over a drug combination called Kaletra, has yet to be resolved. The third lesson is to encourage voluntary action. In 1992, Brazil had 120 charities and voluntary groups devoted to AIDS. By the turn of the century, that had risen to 500. The virtues of vol- untarism were recently confirmed when the Global Fund (the main multilateral distributor of anti-AIDS money to poor countries) audited the success of its donations. It found that spending by vol- untary groups usually produced the best value for the money. The fourth lesson is to do the sums. One of the arguments that has sustained Brazil’s anti-AIDS program is “if you think action is expensive, try inaction.” The government spent $1.8 billion on antiretroviral drugs between 1996 and 2002 but estimates that early treatment saved it more than $2.2 billion in hospital costs over the same period. Add that to the GDP loss that Brazil would

have suffered if the World Bank had been right, and an aggres- sive program of prevention and treatment does not seem so costly after all.

INDIA S. Mani’s small barbershop in a southern Indian city looks like any other the world over. It’s equipped with all the tools of the trade: scissors, combs, razors—and condoms, too. A blue box full of free prophylactics stands in plain view of his customers as Mani trims hair and dispenses advice on safe sex, a new dimension to his 20-year career. “I start by talking about the family and children,” Mani explains, snipping a client’s mous- tache. “Slowly, I get to women, AIDS, and condoms.” Many Indian men are too embarrassed to buy condoms at a drugstore or to talk freely about sex with health counselors and family members. There’s one place where they let down their hair: the barbershop. So, the state of Tamil Nadu is training barbers to be frontline soldiers in the fight against AIDS. Programs like the barber scheme are what make Tamil Nadu, a relatively poor Indian state that’s home to 60 million people, a pos- sible model for innovative and cost-effective methods to contain AIDS in the developing world. Six years after it was first detected in India, the AIDS virus is quickly spreading in the world’s second most populous nation. Already, up to 2.4 million of India’s 1 billion people are infected with HIV—more than in any other country, according to UNAIDS, the United Nations’ AIDS agency. But faced with more immediate and widespread health woes, such as tuberculosis and malaria, officials in many Indian states are reluctant to make AIDS prevention a priority. And in some states, the acquired immunodeficiency syndrome is regarded as a Western disease of decadence; officials deny that prostitution and drug use even exist in their midst. “Some Indian states are still in total denial or ignorance about the AIDS problem,” says Salim Habayeb, a World Bank physician who oversees an $84 million loan to India for AIDS prevention activities. Tamil Nadu, the state with the third-highest incidence of HIV infection, has been open about its problem. Before turning to barbers for help, Tamil Nadu was the first state to introduce AIDS education in high school and the first to set up a statewide information hotline. Its comprehensive AIDS education pro- gram targets the overall population, rather than only high-risk groups. In the past two years, awareness of AIDS in Tamil Nadu has jumped to 95 percent of those polled, from 64 percent, according to Operations Research Group, an independent survey group. “Just two years ago, it was very difficult to talk about AIDS and the condom,” says P. R. Bindhu Madhavan, director of the Tamil Nadu State AIDS Control Society, the autonomous state agency manag- ing the prevention effort. The AIDS fighters take maximum advantage of the local cul- ture to get the message across. Tamils are among the most ardent moviegoers in this film-crazed country. In the city of Madras, people line up for morning screenings even during weekdays. Half of the state’s 630 theaters are paid to screen an AIDS-awareness short before the main feature. The spots are usually melodramatic musicals laced with warnings. In the countryside, where cinemas are scarce, a movie mobile does the job. The concept mimics that used by multinationals, such as Colgate-Palmolive, for rural advertising. Bright red-and-blue

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trucks ply the back roads, blaring music from well-known movie soundtracks whose lyrics have been rewritten to address AIDS issues. In villages, hundreds gather for the show, on a screen that pops out of the rear of the truck. In one six-minute musical, a young husband’s infidelity leads to his death from AIDS, the financial ruin of his family, and then the death of his wife, also infected. The couple’s toddler is left alone in the world. The heart-rending tale is followed by a brief lecture by an AIDS educator—and the offer of a free pack of condoms and an AIDS brochure. Tamil Nadu’s innovations have met with obstacles. It took several months for state officials to persuade Indian government television, Doordarshan, to broadcast an AIDS commercial featur- ing the Hindu gods of chastity and death. Even then, Madhavan says, Doordarshan “wouldn’t do it as a social ad, so we have to pay a commercial rate.” Later, the network refused to air a three-minute spot in which a woman urges her husband, a truck driver, to use a condom when he’s on the road. Safe infidelity was deemed “inappropriate for Indian living rooms,” says Madhavan. A number of commercial satellite channels have been willing to run the ad. Tamil Nadu has met little resistance recruiting prostitutes for the cause. For almost a year, 37-year-old prostitute Vasanthi has been distributing condoms to colleagues. With state funding, a nongovernmental agency has trained her to spread the word about AIDS and other sexually transmitted diseases. As an incentive, the state pays participants like Vasanthi, a mother of three, the equivalent of $14 a month, about what she earns from entertaining a client. Before Vasanthi joined the plan, she didn’t know that the condom could help prevent HIV infection. These days, if any client refuses to wear a condom, “I kick him out, even if it takes using my shoes,” she says. “I’m not flexible about this.” More men are also carrying their own condoms, she says. Thank barbers such as Mani for that. Especially in blue-collar areas of Madras, men “trim their hair and beard before frequenting a commercial sex worker,” says Madhavan. They can pick up their condom on the way out. Tamil Nadu launched the barber program in Madras last March. So far, it has enlisted 5,000 barbers, who receive AIDS education at meetings each Tuesday—the barbers’ day off. The barbers aren’t paid to be AIDS counselors, but they appear to take pride in their new responsibility. Over the generations, India’s barbers have been respected as traditional healers and trusted advisers. “If you want to get to the king’s ears, you tell his barber,” says Madhavan, the state AIDS director. Reinforcing the image of barbers as healers, the local trade group is called the Tamil Nadu Medical Barber Association. “I first talked about AIDS with my barber,” says Thiyagrajan, an electrician in his 40s. “I don’t have multiple partners, so I don’t need a condom, but I take them for my friends.” One recent night, a man in his 30s walked into Aruna Hair Arts, greeted Swami, then headed out the door with a fistful of condoms scooped from the plastic dispenser. “That’s OK,” Swami says approvingly. “He’s a regular customer.” A local nongovernmental organization helps barbers replenish condom stocks by providing each shop with self-addressed order forms. But the central government hasn’t always been able to meet supply, for reasons ranging from bureaucracy to price disputes with manufacturers.

Tamil Nadu has started sourcing condoms from elsewhere. But they’re too expensive to give away. So the next stage of the barber scheme, just under way, is to charge two rupees (six cents) for a two-condom “pleasure pack.” The barbers will get a 25 percent commission. Thus far, the only perk of participating has been a free wall calendar listing AIDS prevention tips. Roughly 30 percent of barbers approached by Tamil Nadu have refused to participate in the AIDS program, fearing that they would alienate customers. But those who take part insist that carrying the AIDS message hasn’t hurt business. “We give the message about AIDS, but we still gossip about women,” says barber N. V. Durairaj at Rolex Salon. Multinational soft drink giants Coke and Pepsi may soon become part of the Indian government’s efforts to reach out to people in far-flung areas to spread awareness about HIV/AIDS and promote the use of condoms. Where social marketing efforts have failed in reaching supplies of condoms, the idea is to reach out through the soft drink firms that have managed to set up a marketing network estimated at more than 1 million outlets across the country. “Realizing their reach, we have appealed to the cola companies PepsiCo and Coca-Cola to allow us to piggyback on their advertisement, including possible slogans on their soft drinks bottles,” a senior health ministry official said. “We have also asked them to help us with the distribution of condoms through their outlets in remote areas.” The requests have elicited encouraging response from both the multinationals. “We are planning to talk to them and hope that they will soon be on board with our awareness campaign and pro- motion of condom use,” the official said. What led to the National AIDS Control Organisation (NACO) looking to Coke and Pepsi for support was the encouraging response they received for advertisements featuring cricket stars advising on the need for preparedness. Some campaigns even had them carrying condoms along with the cricket gear. Backed by 10 countries, including India, the International Cricket Council (ICC) has been actively supporting efforts to promote awareness about HIV/AIDS through campaigns on safe sex. “So whether it is cricket stumps bearing condoms or cricketers themselves urging the need for preparedness, we are finding good response among the public.” NACO also wants to take the campaign forward with celebrity endorsement at a time when sensitive films about HIV/ AIDS like Phir Milenge (“We’ll Meet Again”) and My Brother Nikhil have struck a responsive chord among viewers. The effort is to ensure that the number of HIV-positive cases in the country is contained at the official estimate of 5.13 million. Besides cola companies, several other multinational and national companies with large sales networks, such as banks, are now being looked at by NACO as potential vehicles for creating mass aware- ness and promotion of condoms.

LONDON INTERNATIONAL GROUP London International Group (LIG) is recognized worldwide as a leader in the development of latex and thin-film barrier technolo- gies. The Group has built its success on the development of its core businesses: the Durex family of branded condoms, Regent medical gloves, and Marigold household and industrial gloves. These are supported by a range of noncore health and beauty products. With operational facilities in over 40 countries, 12 manufac- turing plants, either wholly or jointly owned, and an advanced

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research and development facility based in Cambridge, England, LIG is well placed to expand into the new emerging markets of the world. Durex is the world’s number one condom brand in terms of quality, safety, and brand awareness. The Durex family of condom brands includes Sheik, Ramses, Hatu, London, Kohinoor, Dua Lima, Androtex, and Avanti. Sold in over 130 countries world- wide and leader in more than 40 markets, Durex is the only global condom brand. The development of innovative and creative marketing strate- gies is key to communicating successfully with target audiences. Consumer marketing initiatives remain focused on supporting the globalization of Durex. A series of innovative yet cost-effective projects have been used to communicate the global positioning “Feeling Is Everything” to the target young adult market, securing loyalty. The Durex Global Survey, together with a unique multimillion- pound global advertising and sponsorship contract with MTV, has successfully emphasized the exciting and modern profile of Durex and presented significant opportunities for local public relations and event sponsorship, especially in emerging markets like Taiwan. LIG continues to focus on education, using sponsorship of events such as the XI Annual AIDS Conference held in Vancouver and other educational initiatives to convey the safer sex message to governments, opinion formers, and educators worldwide.

JAPAN London Okamoto Corporation, the joint venture company between London International Group and Okamoto Industries, announced the Japanese launch of Durex Avanti, the world’s first polyure- thane male condom. This is the first time an international condom brand will be available in Japan, the world’s most valuable condom market, which is estimated to be worth £260 million ($433 million). Durex Avanti has already been successfully launched in the United States and Great Britain and will be launched in Italy and other selected European countries within a year. Durex Avanti condoms are made from Duron, a unique poly- urethane material twice as strong as latex, which enables them to be made much thinner than regular latex condoms, thereby increasing sensitivity without compromising safety. In addi- tion, Durex Avanti condoms are able to conduct body heat, creating a more natural feeling, and are the first condoms to be totally odorless, colorless, and suitable for use with oil-based lubricants.

Commenting on the launch, Nick Hodges, chief executive of LIG, said; “Japan is a very important condom market; with oral contraceptives still not publicly available, per capita usage rates for condoms are among the highest in the world. Our joint venture with Okamoto, Japan’s leading condom manufacturer, gives us instant access to this strategically important market.” The joint venture with Okamoto, which is the market leader in Japan with a 53 percent share, was established with the specific purpose of marketing Durex Avanti. Added Takehiko Okamoto, president of Okamoto, “We are confident that such an innovative and technically advanced product as Durex Avanti, coupled with our strong market franchise, will find significant consumer appeal in Japan’s sophisticated condom market.” Durex Avanti, which is manufactured at LIG’s research and development center in Cambridge, England, has taken over ten years to develop and represents an investment by LIG of approxi- mately £15 million.

QUESTIONS 1. Comment on the Brazilian and Indian governments’ strategies

for the prevention of AIDS via the marketing of condoms. 2. How is the AIDS problem different in the United States

compared with Brazil and India? 3. Would the approaches described in Brazil and India work in

the United States? Why or why not? 4. Suggest additional ways that London International Group

could promote the prevention of AIDS through the use of condoms worldwide.

5. Do you think it would be a good idea for Coke and Pepsi to participate in a condom distribution program in India, Brazil, and the United States?

Sources: “Half a Million Brazilians Are Infected with the AIDS Virus,” Associated Press, December 21, 1996; Andrea McDaniels, “Brazil Turns to Women to Stop Dramatic Rise in AIDS Cases. São Paulo Pushes Female Condom to Protect Married Women from Husbands, but Costs of Devices Are High,” Christian Science Monitor, January 9, 1998, p. 7; “Brazil to Hand out 10 Million Condoms during Carnival,” Chicago Tribune, January 19, 1998, p. 2; Miriam Jordan, “India Enlists Barbers in the War on AIDS,” The Wall Street Journal, September 24, 1996, p. A18; Caro Ezzzell, “Care for a Dying Continent,” Scientific American, May 2000, pp. 96 –105; Ginger Thompson, “In Grip of AIDS, South Africa Cries for Equity,” The New York Times, p. 4; “Roll Out, Roll Out—AIDS in Brazil,” The Economist, July 30, 2005, p. 376; “AIDS Campaign May Soon Piggyback on Pepsi, Coke,” http://www.HindustanTimes.com, August 30, 2005; “A Portrait in Red—AIDS in Brazil,” The Economist, March 15, 2008, p. 38; World Health Organization, 2012. Also see the website http://www.durex.com.

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CASE 4-6 Making Socially Responsible and Ethical Marketing Decisions: Selling Tobacco to Third World Countries

Strategic decisions move a company toward its stated goals and perceived success. Strategic decisions also reflect the firm’s social responsibility and the ethical values on which such decisions are made. They reflect what is considered important and what a com- pany wants to achieve. Mark Pastin, writing on the function of ethics in business deci- sions, observes:

There are fundamental principles, or ground rules, by which organizations act. Like the ground rules of individuals, orga- nizational ground rules determine which actions are possible for the organization and what the actions mean. Buried be- neath the charts of organizational responsibility, the arcane strategies, the crunched numbers, and the political intrigue of every firm are sound rules by which the game unfolds.

The following situations reflect different decisions made by multinational firms and governments and also reflect the social responsibility and ethical values underpinning the decisions. Study the following situations in the global cigarette marketplace carefully and assess the ground rules that guided the decisions of firms and governments.

EXPORTING U.S. CIGARETTE CONSUMPTION In the United States, 600 billion cigarettes are sold annually, but sales are shrinking rapidly. Unit sales have been dropping about 1 to 2 percent a year, and sales have been down by almost 5 percent in the last six years. The U.S. Surgeon General’s campaign against smoking, higher cigarette taxes, non-smoking rules in public areas, and the concern Americans have about general health have led to the decline in tobacco consumption. Faced with various class-action lawsuits, the success of states in winning lawsuits, and pending federal legislation, tobacco companies have stepped up their international marketing activities to maintain profits. Even though companies have agreed to sweeping restrictions in the United States on cigarette marketing and secondhand smoke and to bolder cancer-warning labels, they are fighting as hard as ever in the Third World to convince the media, the public, and policymakers that similar changes are not needed. In seminars at luxury resorts worldwide, tobacco companies invite journalists, all expenses paid, to participate in programs that play down the health risks of smoking. It is hard to gauge the influence of such semi- nars, but in the Philippines, a government plan to reduce smoking by children was “neutralized” by a public relations campaign from cigarette companies to remove “cancer awareness and prevention” as a “key concern.” A slant in favor of the tobacco industry’s point of view seemed to prevail. At a time when most industrialized countries are discourag- ing smoking, the tobacco industry is avidly courting consumers throughout the developing world using catchy slogans, obvious image campaigns, and single-cigarette sales that fit a hard-pressed customer’s budget. The reason is clear: The Third World is an

expanding market. As an example, Indonesia’s per capita cigarette consumption quadrupled in less than ten years. Increasingly, cigarette advertising on radio and television is being restricted in some countries, but other means of promotion, especially to young people, are not controlled. China, with more than 300 million smokers, produces and con- sumes about 1.4 trillion cigarettes per year, more than any other country in the world. Estimates are that China has more smokers than the United States has people. Just 1 percent of that 1.4 trillion cigarette market would increase a tobacco company’s overseas sales by 15 percent and would be worth as much as $300 million in added revenue. American cigarette companies have received a warm welcome in Russia, where at least 50 percent of the people smoke. Consumers are hungry for most things Western, and tobacco taxes are low. Unlike in the United States and other countries that limit or ban cigarette advertising, there are few effective controls on tobacco products in Russia. Russia, the world’s fourth largest cigarette market, has proved to be an extremely profitable territory for British American Tobacco (BAT). BAT Russia, established in 1949, sold 65 billion cigarettes in Russia in 2005, giving it almost one-fifth of market share.

ADVERTISING AND PROMOTION In Gambia, smokers send in cigarette box tops to qualify for a chance to win a new car. In Argentina, smoking commercials fill 20 percent of television advertising time. And in crowded African cities, billboards that link smoking to the good life tower above the sweltering shantytowns. Such things as baby clothes with cigarette logos, health warnings printed in foreign languages, and tobacco- sponsored contests for children are often featured in tobacco ads in Third World countries. Latin American tobacco consumption rose by more than 24 percent over a ten-year period. Critics claim that sophisticated promotions in unsophisti- cated societies entice people who cannot afford the necessities of life to spend money on a luxury—and a dangerous one at that. The sophistication theme runs throughout the smoking ads. In Kinshasa, Zaire, billboards depict a man in a business suit stepping out of a black Mercedes as a chauffeur holds the door. In Nigeria, promotions for Graduate brand cigarettes show a university stu- dent in his cap and gown. Those for Gold Leaf cigarettes have a barrister in a white wig and the slogan, “A very important cigarette for very important people.” In Kenya, a magazine ad for Embassy cigarettes shows an elegant executive officer with three young men and women equivalent to American yuppies. The most disturbing trend in developing countries is advertising that associates tobacco with American affluence and culture. Some women in Africa, in their struggle for women’s rights, defiantly smoke cigarettes as a symbol of freedom. Billboards all over Russia feature pictures of skyscrapers and white sandy beaches and slogans like “Total Freedom” or “Rendezvous with America.” They aren’t advertising foreign travel but American cigarette brands.

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Every cigarette manufacturer is in the image business, and tobacco companies say their promotional slant is both reason- able and common. They point out that in the Third World a lot of people cannot understand what is written in the ads anyway, so the ads zero in on the more understandable visual image. “In most of the world, the Marlboro Man isn’t just a symbol of the Wild West; he’s a symbol of the West.” “You can’t convince people that all Americans don’t smoke.” In Africa, some of the most effec- tive advertising includes images of affluent white Americans with recognizable landmarks, such as the New York City skyline, in the background. In much of Africa, children as young as five are used to sell single cigarettes, affordable to other children, to support their own nicotine habits. Worldwide nearly one-fourth of all teenage smokers smoked their first cigarette before they were 10 years old. The scope of promotional activity is enormous. In Kenya, a major tobacco company is the fourth-largest advertiser. Tobacco- sponsored lotteries bolster sales in some countries by offering as prizes expensive goods that are beyond most people’s budgets. Gambia has a population of just 640,000, but a tobacco company lottery attracted 1.5 million entries (each sent in on a cigarette box top) when it raffled off a Renault car. Evidence is strong that the strategy of tobacco companies is to target young people as a means of expanding market demand. Report after report reveals that adolescents receive cigarettes free as a means of promoting the product. For example, in Buenos Aires, a Jeep decorated with the yellow Camel logo pulls up in front of a high school. The driver, a blond woman wearing khaki safari gear, begins handing out free cigarettes to 15- and 16-year- olds on lunch recess. Teens visiting MTV’s websites in China, Germany, India, Poland, and Latin America were given the chance to click on a banner ad that led them to a questionnaire about their exposure to cigarette ads and other marketing tools in their coun- tries. Some 10,000 teens responded to the banner ads. “In the past week, more than 62 percent of teenagers in these countries have been exposed to tobacco advertising in some form,” the 17-year- old SWAT (Students Working against Tobacco) chairman told Reuters. “The tobacco companies learned that marketing to teens and kids worked in this country, but since they can’t do it here anymore, they’ve taken what they learned to other countries.” At a video arcade in Taipei, free American cigarettes are strewn atop each game. “As long as they’re here, I may as well try one,” says a high school girl. In Malaysia, Gila-Gila, a comic book popular with elementary school students, carries a Lucky Strike ad. Attractive women in cowboy outfits regularly meet teenagers going to rock concerts or discos in Budapest and hand them Marlboros. Those who accept a light on the spot also receive Marlboro sunglasses. According to the American Lung Association Tobacco Policy Trend Alert, the tobacco industry is offering candy-flavored ciga- rettes in an attempt to continue to target teens.1 Advertising and promotion of these products uses hip-hop imagery, attractive women, and other imagery to appeal to youth in similar ways that Joe Camel did a decade ago. Marketing efforts for candy-flavored cigarettes came after the Master Settlement Agreement prohibited tobacco companies from using cartoon characters to sell cigarettes. Researchers recently released the results of several surveys that showed that 20 percent of smokers ages 17 to 19 smoked flavored cigarettes, while only 6 percent of smokers ages 17 to 20 did.

In Russia, a U.S. cigarette company sponsors disco parties where thousands of young people dance to booming music. Admis- sion is the purchase of one pack of cigarettes. At other cigarette- sponsored parties, attractive women give cigarettes away free. In many countries, foreign cigarettes have a status image that also encourages smoking. A 26-year-old Chinese man says he switched from a domestic brand to Marlboro because “You feel a higher social position” when you smoke foreign cigarettes. “Smoking is a sign of luxury in the Czech Republica as well as in Russia and other Eastern countries,” says an executive of a Czech tobacco firm that has a joint venture with a U.S. company. “If I can smoke Marlboro, then I’m a well-to-do man.” The global tobacco companies insist that they are not attempt- ing to recruit new smokers. They say they are only trying to encourage smokers to switch to foreign brands. “The same number of cigarettes are consumed whether American cigarettes or not,” was the comment of one executive. Although cigarette companies deny they sell higher tar and nic- otine cigarettes in the Third World, one British tobacco company does concede that some of its brands sold in developing countries contain more tar and nicotine than those sold in the United States and Europe. A recent study found three major U.S. brands with filters had 17 milligrams of tar in the United States, 22.3 in Kenya, 29.7 in Malaysia, and 31.1 in South Africa. Another brand with filters had 19.1 milligrams of tar in the United States, 28.8 in South Africa, and 30.9 in the Philippines. The firm says that Third World smokers are used to smoking their own locally made prod- uct, which might have several times more tar and nicotine. Thus, the firm leaves the tar- and nicotine-level decisions to its foreign subsidiaries, who tailor their products to local tastes. C. Everett Koop, the retired U.S. Surgeon General, was quoted in a recent news conference as saying, “Companies’ claims that science cannot say with certainty that tobacco causes cancer were flat-footed lies” and that “sending cigarettes to the Third World was the export of death, disease, and disability.” An Oxford University epidemiologist has estimated that, because of increasing tobacco consumption in Asia, the annual worldwide death toll from tobacco- related illnesses will more than triple over the next two decades. Perhaps 100 million people died prematurely during the 20th cen- tury as a result of tobacco, making it the leading preventable cause of death and one of the top killers overall. According to the World Health Organization, each year smoking causes 4 million deaths globally, and it expects the annual toll to rise to 10 million in 2030.

GOVERNMENT INVOLVEMENT Third World governments often stand to profit from tobacco sales. Brazil collects 75 percent of the retail price of cigarettes in taxes, some $100 million a month. The Bulgarian state-owned tobacco company, Bulgartabac, contributes almost $30 million in taxes to the government annually. Bulgartabac is a major exporter of ciga- rettes to Russia, exporting 40,000 tons of cigarettes annually. Tobacco is Zimbabwe’s largest cash crop. One news report from a Zimbabwe newspaper reveals strong support for cigarette companies. “Western anti-tobacco lobbies demonstrate unbeliev- able hypocrisy,” notes one editorial. “It is relatively easy to sit in Washington or London and prattle on about the so-called evils of smoking, but they are far removed from the day-to-day grind of earning a living in the Third World.” It goes on to comment that it doesn’t dispute the fact that smoking is addictive or that it may cause diseases, but “smoking does not necessarily lead to certain

1See “From Joe Camel to Kauai Kolada—The Marketing of Candy-Flavored Cigarettes,” http://lungusa.org.

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death. Nor is it any more dangerous than other habits.” Unfortu- nately, tobacco smoking has attracted the attention of a particu- larly “sanctimonious, meddling sector of society. They would do better to keep their opinions to themselves.” Generally, smoking is not a big concern of governments beset by debt, internal conflict, drought, or famine. It is truly tragic, but the worse famine becomes, the more people smoke—just as with war, when people who are worried want to smoke. “In any case,” says one representative of an international tobacco company, “People in developing countries don’t have a long enough life expectancy to worry about smoking-related problems. You can’t turn to a guy who is going to die at age 40 and tell him that he might not live up to 2 years extra at age 70.” As for promoting cigarettes in the Third World, “If there is no ban on TV advertising, then you aren’t going to be an idiot and impose restrictions on yourself,” says the representative, “and likewise, if you get an order and you know that they’ve got money, no one is going to turn down the business.” Cigarette companies figure China’s self-interest will preserve its industry. Tobacco provides huge revenues for Beijing because all tobacco must be sold through the China National Tobacco Company monopoly. Duty on imported cigarettes is nearly 450 percent of their value. Consequently, tobacco is among the central government’s biggest source of funding, accounting for more than $30 billion in income in 2005. China is also a major exporter of tobacco.

FOCUS ON DEVELOPING MARKETS Lawsuits, stringent legislation against advertising, laws restricting where people can smoke, and other antismoking efforts on the part of governments have caused tobacco companies to intensify their efforts in those markets where restrictions are fewer and govern- ments more friendly. As part of a strategy to increase its sales in the developing world, Philip Morris International (PMI) was spun off from Philip Morris USA in 2008 to escape the threat of litigation and government regulation in the United States. The move frees the tobacco giant’s international operations of the legal and public- relations headaches in the United States that have hindered its growth. Its practices are no longer constrained by American public opinion, paving the way for broad product experimentation. A new product, Marlboro Intense, is likely to be part of an aggressive blitz of new smoking products PMI will roll out around the globe. The Marlboro Intense cigarette has been shrunk down by about a half inch and offers smokers seven potent puffs apiece, versus the average of eight or so milder draws. The idea behind Intense is to appeal to customers who, due to indoor smoking bans, want to dash outside for a quick nicotine hit but don’t always fin- ish a full-size cigarette. The CEO of PMI says there are “possibly 50 markets that are interested in deploying Marlboro Intense.” Other product innovations include sweet-smelling cigarettes that contain tobacco, cloves and flavoring—with twice the tar and nicotine levels of a conventional U.S. cigarette. Marlboro Mix 9, a high-nicotine, high-tar cigarette launched in Indonesia in 2007, and a clove-infused Mix 9 will be exported to other southeast Asian markets next. Another iteration of the Marlboro brand, the Marlboro Filter Plus, is being sold in South Korea, Russia, Kazakhstan, and Ukraine. It touts a special filter made of carbon, cellulose acetate, and a tobacco plug that the company claims low- ers the tar level while giving smokers a smoother taste. One of PMI’s immediate goals is to harness the huge potential of China’s smoking population, as well as some of that country’s own brands, which it has agreed to market worldwide. With some

350 million smokers, China has 50 million more cigarette buyers than the U.S. has people, according to Euromonitor. While smoking rates in developed countries have slowly declined, they have shot up dramatically in some developing counties where PMI is a major player. These include Pakistan (up 42 percent since 2001), Ukraine (up 36 percent), and Argentina (up 18 percent).

ANTISMOKING PROMOTIONS Since the early 1990s, multinational tobacco companies have promoted “youth smoking prevention” programs as part of their “Corporate Social Responsibility” campaigns. The companies have partnered with third-party allies in Latin America, most notably nonprofit educational organizations and education and health ministries to promote youth smoking prevention. Even though there is no evidence that these programs reduce smoking among youths, they have met the industry’s goal of portraying the companies as concerned corporate citizens. In fact, a new study proves that youth smoking prevention ads created by the tobacco industry and aimed at parents actually increase the likelihood that teens will smoke. The study, “Impact of Televised Tobacco Industry Smoking Prevention Advertising on Youth Smoking-Related Beliefs, Intentions and Behavior,” published in the December 2006 issue of the American Journal of Public Health, sought to understand how the tobacco industry uses “youth smoking prevention” programs in Latin America. Tobacco industry documents, so-called social reports, media reports, and material provided by Latin American public health advocates were all analyzed. The study is the first to examine the specific effect of tobacco company parent-focused advertising on youth. It found that ads that the industry claims are aimed at preventing youth from smoking actually provide no benefit to youth. In fact, the ads that are created for parental audiences are also seen by teens and are associated with stronger intentions by teens to smoke in the future. Brazil has the world’s strictest governmental laws against smoking, consisting of highly visible antismoking campaigns, severe controls on advertising, and very high tax rates on smoking products. Despite these obstacles, the number of smokers in Brazil continues to grow. In 2006, there were approximately 44 million smokers in the country, up from 38 million in 1997. Factors driv- ing this trend include the low price of cigarettes, which are among the lowest in the world; the easy access to tobacco products; and the actions taken by the powerful tobacco companies to slow down antismoking legislation in Brazil.

ASSESSING THE ETHICS OF STRATEGIC DECISIONS Ethical decision making is not a simplistic “right” or “wrong” determination. Ethical ground rules are complex, tough to sort out and to prioritize, tough to articulate, and tough to use. The complexity of ethical decisions is compounded in the international setting, which comprises different cultures, different perspectives of right and wrong, different legal requirements, and different goals. Clearly, when U.S. companies conduct business in an international setting, the ground rules become further compli- cated by the values, customs, traditions, ethics, and goals of the host countries, which each have developed their own ground rules for conducting business. Three prominent American ethicists have developed a framework to view the ethical implications of strategic decisions by American

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firms. They identify three ethical principles that can guide American managers in assessing the ethical implications of their decisions and the degree to which these decisions reflect these ethical principles or ground rules. They suggest asking, “Is the corporate strategy accept- able according to the following ethical ground rules?” These questions can help uncover the ethical ground rules embed- ded in the tobacco consumption situation described in this case. These questions lead to an ethical analysis of the degree to which this strat- egy is beneficial or harmful to the parties and, ultimately, whether it is a “right” or “wrong” strategy, or whether the consequences of this strategy are ethical or socially responsible for the parties involved. These ideas are incorporated in the decision tree in Exhibit 1.

Exhibit 1 A Decision Tree for Incorporating Ethical and Social Responsibility Issues into Multinational Business Decisions

Does the decision efficiently optimize the common good or benefits of:

Are there critical factors that justify suboptimizing these goals and satisfactions?

YES

YES

YES

YES

YES

YES

NO

NO

NO

NO

NO

NO

Are there critical factors that justify the violation of a canon of justice?

Does the decision respect the rights of individuals involved?

Does the corporate decision respect the canons of justice or fairness to all parties involved?

Are there critical factors that justify the abrogation of a right?

Reject Decision

THE BUSINESS FIRM? Stockholders Management Profits Growth Other

THE ECONOMY? Economic growth Allocation of resources Production and distribution of goods and services Other

SOCIETY? Culture Order Justice “The good life” Other

THE INDIVIDUAL? Freedom Health and welfare Self-realization Human dignity Opportunity Other

Reject Decision

Reject Decision

Accept Decision

Principles Question

Utilitarian ethics (Bentham, Smith)

Does the corporate strategy optimize the “common good” or benefits of all constituencies?

Rights of the parties (Kant, Locke)

Does the corporate strategy respect the rights of the individuals involved?

Justice or fairness (Aristotle, Rawls)

Does the corporate strategy respect the canons of justice or fairness to all parties?

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Laczniak and Naor discuss the complexity of international eth- ics or, more precisely, the ethical assumptions that underlie strate- gic decisions for multinationals.2 They suggest that multinationals can develop consistency in their policies by using federal law as a baseline for appropriate behavior as well as respect for the host country’s general value structure. They conclude with four recom- mendations for multinationals:

1. Expand codes of ethics to be worldwide in scope. 2. Expressly consider ethical issues when developing

worldwide corporate strategies. 3. If the firm encounters major ethical dilemmas, consider

withdrawal from the problem market.

4. Develop periodic ethics-impact statements, including impacts on host parties.

See www.who.int, the World Health Organization’s website, for more details regarding the current tobacco controversy.

QUESTIONS 1. Use the model in Exhibit 1 as a guide and assess the ethical and

social responsibility implications of the situations described. 2. Can you recommend alternative strategies or solutions to the

dilemmas confronting the tobacco companies? To govern- ments? What is the price of ethical behavior?

3. Should the U.S. government support U.S. tobacco company interests abroad?

4. Should a company be forced to stop marketing a product that is not illegal, such as cigarettes?

Sources: “Smoke Over the Horizon; U.S. Gains in Tobacco Control Are Being Offset Internationally,” The Washington Post, July 23, 2006; “Death and Taxes: England Has Become the Latest in a Series of Countries to Vote for Restrictions on Smoking in Public Places,” Financial Management (UK), April 1, 2006; “Trick or Treat? Tobacco Industry Prevention Ads Don’t Help Curb Youth Smoking,” PR Newswire, October 31, 2006; “China Exclusive: China, With One Third of World’s Smokers, Promises a ‘Non-Smoking’ Olympics,” Xinhua News Agency, May 29, 2006; “Tobacco Consumption and Motives for Use in Mexican University Students,” Adolescence, June 22, 2006; “A Change in the Air: Smoking Bans Gain Momentum Worldwide,” Environmental Health Perspectives, August 1, 2007; “Adams Won’t Kick the BAT Habit: The Head of British American Tobacco Is Stoical About the Looming Ban on Smoking in Public Spaces: BAT will Adapt,” The Sunday Telegraph London, June 10, 2007; “Heart Disease, Stroke Plague Third World,” Associated Press (Online), April 4, 2006; “Get a Detailed Picture of the Tobacco Industry in Brazil,” M2 Press Wire, December 20, 2007; Vanessa O’Connell, “Philip Morris Readies Global Tobacco Blitz; Division Spin-off Enables Aggressive Product Push; High-Tar Smokes in Asia,” The Wall Street Journal, January 29, 2008; “The Global Tobacco Threat,” The New York Times, February 19, 2008; “How to Save a Billion Lives; Smoking,” The Economist (London,) February 9, 2008; “Whether Here or There, Cigarettes Still Kill People,” The Wall Street Journal, February 4, 2008; World Health Organization, 2012.

2Gene R. Laczniak and Jacob Naor, “Global Ethics: Wrestling with the Corporate Conscience,” Business, July–September 1985.

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CASE 4-7 The Obstacles to Introducing a New Product into a New Market

Refer to our descriptions of introduction failures, such as Mattel’s introduction of blonde Barbie, the PlayPump, and Taco Bell in Mexico. With those stories in mind, write critiques of (1) Philips’

efforts in marketing cook stoves in Africa and India and (2) Lego’s introduction of a new girls’ line.

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CASE 4-8 Mary Kay in India

Sheryl Adkins-Green couldn’t ask for a better assignment. As the newly appointed vice president of brand development at Mary Kay, Inc., she is responsible for development of the product port- folio around the world, including global initiatives and prod ucts specifically formulated for global markets. She is enthusiastic about her position, noting that, “There is tremendous opportunity for growth. Even in these economic times, women still want to pamper themselves, and to look good is to feel good.” Getting up to speed on her new company and her new position topped her short-term agenda. She was specifi cally interested in the company’s efforts to date to build the Mary Kay brand in India.

THE MARY KAY WAY Mary Kay Ash founded Mary Kay Cosmetics in 1963 with her life savings of $5,000 and the support of her 20-year-old son, Richard Rogers, who currently serves as execu tive chairman of Mary Kay, Inc. Mary Kay, Inc., is one of the largest direct sell- ers of skin care and color cosmetics in the world with more than $2.5 billion in annual sales. Mary Kay brand products are sold in more than 35  markets on five continents. The United States, China, Russia, and Mexico are the top four markets served by the company. The company’s global independent sales force exceeds 2 million. About 65 percent of the company’s independent sales representatives reside outside the United States. Mary Kay Ash’s founding principles were simple, time-tested, and remain a fundamental company business philosophy. She adopted the Golden Rule as her guiding principle, determining the best course of action in virtu ally any situation could be easily discerned by “doing unto others as you would have them do unto you.” She also steadfastly believed that life’s priorities should be kept in their proper order, which to her meant “God first, fam ily second, and career third.” Her work ethic, approach to business, and success have resulted in numerous awards and recognitions including, but not limited to, the Hora tio Alger American Citi- zen Award, recognition as one of “America’s 25 Most Influential Women,” and induction into the National Business Hall of Fame. Mary Kay, Inc., engages in the development, manufac ture, and packaging of skin care, makeup, spa and body, and fragrance products for men and women. It offers anti-aging, cleanser, mois- turizer, lip and eye care, body care, and sun care products. Over- all, the company produces more than 200 premium products in its state-of-the-art manufacturing facilities in Dallas, Texas, and Hangzhou, China. The company’s approach to direct selling employs the “party plan,” whereby independent sales representa- tives host parties to demonstrate or sell products to consumers.

GROWTH OPPORTUNITIES IN ASIA- PACIFIC MARKETS Asia-Pacific markets represent major growth opportuni ties for Mary Kay, Inc. These markets for Mary Kay, Inc., include Australia, China, Hong Kong, India, Korea, Malay sia, New Zealand, the Philippines, Singapore, and Taiwan.

China accounts for the largest sales revenue outside the United States, representing about 25 percent of annual Mary Kay, Inc., worldwide sales. The company entered China in 1995 and cur- rently has some 200,000 indepen dent sales representatives or “beauty consultants” in that country. Part of Mary Kay’s success in China has been attrib uted to the company’s message of female empowerment and femininity, which has resonated in China, a country where young women have few opportunities to start their own businesses. Speaking about the corporate philoso phy at Mary Kay, Inc., KK Chua, President, Asia-Pacific, said, “Mary Kay’s corporate objective is not only to create a market, selling skin care and cosmetics; it’s all about enriching women’s lives by helping women reach their full poten- tial, find their inner beauty and discover how truly great they are.” This view is echoed by Sheryl Adkins-Green, who notes that the Mary Kay brand has “transformational and aspirational” associa- tions for users and beauty consultants alike. Mary Kay, Inc., learned that adjustments to its prod uct line and message for women were necessary in some Asia-Pacific markets. In China, for example, the order of life’s priorities—“God first, family second, and career third”—has been modified to “Faith first, family second, and career third.” Also, Chinese women aren’t heavy users of makeup. Therefore, the featured products include skin cream, anti-aging cream, and whitening creams. As a gener- alization, whitening products are popular among women in China, India, Korea, and the Philippines, where lighter skin is associated with beauty, class, and privilege.

MARY KAY, INDIA Mary Kay, Inc., senior management believed that India repre- sented a growth opportunity for three reasons. First, the Indian upper and consuming classes were growing and were expected to total over 500 million individuals. Second, the population was overwhelmingly young and optimistic. This youthful population continues to push consumerism as the line between luxury and basic items continues to blur. Third, a growing number of working women have given a boost to sales of cosmetics, skin care, and fra- grances in India’s urban areas, where 70 per cent of the country’s middle-class women reside. Senior management also believed that India’s socio-economic characteristics in 2007 were similar in many ways to China in 1995, when the company entered that market (see Figure 1). The Mary Kay culture was viewed as a good fit with the Indian culture, which would ben efit the company’s venture into this market. For example, industry research has shown that continuing moderniza- tion of the country has led to changing aspirations. As a result, the need to be good looking, well-groomed, and stylish has taken a newfound importance. Mary Kay initiated operations in India in September 2007 with a full marketing launch in early 2008. The ini tial launch was in Delhi, the nation’s capital and the sec ond most populated metrop- olis in India, and Mumbai, the nation’s most heavily populated metropolis. Delhi, with per capita income of U.S. $1,420, and

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Mumbai, with per capita income of $2,850, were among the wealthiest met ropolitan areas in India. According to Rhonda Shasteen, chief marketing officer at Mary Kay, Inc., “For Mary Kay to be suc cessful in India, the com pany had to build a brand, build a sales force, and build an effective sup- ply chain to service the sales force.”

Building a Brand Mary Kay, Inc., execu tives believed that brand building in India needed to involve media advertis- ing; literature describing the Mary Kay culture, the Mary Kay story, the com pany’s image; and educa tional material for Mary Kay independent sales rep resentatives. In addition, Mary Kay, Inc., became the cosmetics partner of the Miss India Worldwide Pag eant 2008. At this event, Mary Kay Miss Beautiful Skin 2008 was crowned.

Brand building in India also involved product mix and pricing. Four guide lines were followed:

1. Keep the offering simple and skin care focused for the new Indian sales force and for a new operation.

2. Open with accessibly priced basic skin care products in relation to the competition in order to establish Mary Kay product quality and value.

3. Avoid opening with products that would phase out shortly after launch.

4. Address the key product categories of Skin Care, Body Care, and Color based on current market information.

Brand pricing focused on offering accessibly priced basic skin care to the average middle-class Indian con sumer between the

India 2007 China 1995

Population (million) 1,136 1,198

Population age distribution (0–24; 25–49; 501) 52%, 33%, 15% 43%, 39%, 18%

Urban population 29.2% 29.0%

Population/square mile 990 332

Gross domestic product (U.S.$ billion) 3,113 728

Per capita income (U.S.$) $950 $399

Direct selling sales percent of total cosmetic/skin care sales

3.3% 3.0%

Figure 1 Social and economic statistics for India in 2007 and China in 1995.

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sale,” added Rhonda Shasteen. By late 2009, there were some 4,000 independent sales repre- sentatives in India present in some 200 cities mostly in the northern, west ern, and north- eastern regions of the country.

Creating a Supply Chain Mary Kay, India, imported products into India from China, Korea, and the United States. Products were shipped to regional distribution centers in Delhi and Mumbai, India, where Mary Kay Beauty Centers were located. Beauty Centers served as order pick- up points for the indepen dent sales representatives. Mary Kay beauty consultants purchased products from the company and, in turn, sold them to consumers.

LOOKING AHEAD Mary Kay, Inc., plans to invest around $20 million in the next five years on product develop- ment, company infrastructure, and building its brand in India. “There is a tremendous oppor-

tunity for growth,” says Sheryl Adkins-Green. India represents a particularly attractive opportunity. Developing the brand and brand portfolio and specifically formulating products for Indian consum ers will require her attention to brand positioning and brand equity.

QUESTIONS 1. What information should be included in a written positioning

statement for Mary Kay? 2. How would you draft a formal, written positioning statement

for Mary Kay using the information detailed in question 1? 3. Is Mary Kay a global brand? Why or why not?

ages of 25 and 54. This strat- egy, called “mass-tige pric- ing,” resulted in product price points that were above mass but below prestige competi- tive product prices. Following an initial emphasis on offer- ing high-quality, high-value products, Mary Kay introduced more technologically advanced products that commanded higher price points. For example, the company introduced the Mary Kay Mela-CEP Whitening Sys- tem, consisting of seven prod- ucts, which was specifically formulated for Asian skin in March 2009. This sys tem was “. . . priced on the lower price end of the pres tige category with a great value for money equation,” said Hina Nagarajan, coun try manager for Mary Kay India.

Building a Sales Force According to Adkins-Green, “Mary Kay’s most powerful marketing vehicle is the direct selling orga nization,” which is a key component of the brand’s marketing strategy. Mary Kay relied on its Global Leadership Development Program directors and National Sales directors and the Mary Kay Sales Education staff from the United States and Canada for the initial recruitment and training of independent sales representatives in India. New indepen- dent sales representatives received 2 to 3 days of intensive training and a starter kit that included not only products, but also informa- tion pertaining to product demonstrations, sales presentations, professional demeanor, the company’s history and culture, and team building. “Culture training is very important to Mary Kay (inde pendent sales representatives) because they are going to be the messengers of Mary Kay,” said Hina Nagarajan. “As a direct-selling company that offers products sold person-to-person, we recognize that there’s a personal relationship between consultant and client with every

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CASE 4-9 Adidas Battles Allegations of Shirking Responsibility to Workers

It was April of 2012 and Professor Sioban Harlow, chairwoman of the University of Michigan (U-M) President’s Advisory Committee for Labor Standards and Human Rights (PACLSHR), was prepar- ing for a committee meeting that would decide the course of action to recommend to U-M President Mary Sue Coleman related to the university’s $60-million Adidas contract. It had been more than a year since an Adidas supplier, PT Kizone’s Indonesian factory, denied workers some $3.4 million in severance and death benefits after the factory’s owner fled the country, forcing the factory to shut down. Adidas Group, Nike, the Dallas Cowboys, and other sports apparel producers sourced products from the factory. Adidas supplied university-licensed sports apparel for U-M, the University of Wisconsin-Madison (UW-Madison), and the University of Washington, among others. While Nike and the Dallas Cowboys worked with Green Textile—the buying agent that briefly assumed responsibility for PT Kizone’s factory operations until its closed—to provide part of the severance owed to the work- ers, Adidas refused, indicating that it had stopped ordering products from the factory 10 months before it closed. The com- pany later recanted after a Worker Rights Consortium (WRC) investigation found that Adidas was indeed a buyer at the time of violation, but still denied its responsibility for the workers’ severance. The PACLSHR found Adidas in violation of the U-M code of conduct in regard to branded goods manufactured at PT Kizone’s factory. The U-M chapter of United Students Against Sweatshops (USAS) called for termination of the con- tract with Adidas.

Adidas Supply Chain Like other players in the indus- try, the Adidas Group outsourced most of its production. Its vast network included 1,200 independent factories spread across 63 countries that produced its products (see Exhibit 1). Products

fell into two broad categories; those the company designed, devel- oped, and marketed, and those that it licensed. Adidas resorted to licensing when it did not have internal capability in a prod- uct category. Examples included baseball uniforms, waterproof earphones, and apparel for children. There were two main sourcing models. Under its direct sourcing model, the company maintained direct contractual relationships with a core group of product sup- pliers. The company procured other products through agents under its indirect sourcing model, a legacy of the Reebok acquisition. Since the acquisition, however, Adidas had not brought any new agents on board. Licensed products were classified under the indi- rect sourcing model. The supply chain was complex; direct suppliers could have sub-contractors, agents would source from suppliers, and licensees could source either directly or through their agents. (Exhibit 2 provides a schematic of the Adidas supply chain.) While Adidas had manufacturing agreements with its suppliers, there were no time parameters in its contracts with suppliers. Manufacturing agreements specified the business relationship and laid out expec- tations in terms of quality, labor, environmental standards, and key performance indicators. The company gave non-binding forecasts to the suppliers that specified procurement volumes for the set of products a supplier was to make. These forecasts were updated on a rolling basis.

Workplace Standards and Labor Policies Adidas Group was one of the few brands that published its global supplier list. The company’s stated organizational val- ues related to workplace standards were: performance, passion, integrity, and diversity. Consistent with these values, the organization expected that its partners, including contractors, subcontractors, suppliers, and others, would conduct them- selves with the “utmost fairness, honesty and responsibility in

EMEA (13%)

Americas (20%)

Asia (67%)

Adidas Supplier Factories in 2011 (excluding Adidas-owned factories and licensee factories)

Exhibit 1 Adidas Supplier factories in 2011 (Excluding Adidas-owned factories and licensee factories)

Source: Adidas Group Sustainability Progress Report 2011

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Part 6 Supplementary Material

all aspects of their business.” The organization’s employment standards included:

• No forced labor• No child labor• No discrimination• Provision of legally mandated wages and benefits• Working hours of no more than 60 hours per week and 24 consecutive hours of rest within a seven-day week

• Freedom of association and collective bargaining• Respect and dignity for all employees The company used its social and environmental affairs (SEA) team to monitor its direct suppliers. SEA comprised of 63 employees, the majority of which worked in field opera- tions. Standards within the supply chain were expected to align with the organization’s Fair Labor Association (FLA) accredita- tion. Monitoring was primarily through pre-announced visits. If there was a perceived need, SEA could do an unannounced visit, but this was rare. The frequency of monitoring was based on a risk-assessment of the history and geographic location of the sup- plier. Suppliers were rated on compliance using key performance indicators (KPIs), including management commitment, the quality of management systems in place, worker/ management communi- cation, training delivered, transparence of reporting, and measure- ment of compliance activities. Suppliers received a score of 1-5 within three KPI clusters: self-governance, partnership, and risk management. To effectively use SEA personnel, the KPI ratings were applied in creating three tiers. The first tier, self-governance, was comprised of the top performers capable of managing a program of strong industrial relations, health and safety standards, and employee/management communications. These suppliers had an internal compliance policy and practiced and reported these activi- ties. The second tier, partnership, was for suppliers that could ben- efit from significant training support. Adidas focused on delivering capacity-building programs in collaboration with other companies and multi-stakeholder initiatives, such as the FLA and Better Factories for Work. At the bottom was the risk management tier for the lowest-performing suppliers. Adidas helped them improve their performance, and if they responded well they were moved up to the partnership tier. If not, Adidas would wind down business and eventually terminate the relationship. All monitoring results were uploaded into the Fair Factories Clearinghouse, an external

non-profit program that allowed members to share information, collaborate, and facilitate safe, humane working conditions. For new products, the company would first identify a factory that was capable of making the product. Through prototype pro- duction, Adidas would evaluate supplier engineering and innova- tion capability as well as quality. Financial due diligence was then performed on the supplier. Only then was the SEA team asked to do a factory audit. Some factories did not make the cut, and were dropped from further consideration. For example, 46 percent of fac- tories in China failed the initial assessment; half of these suppliers were given a second chance to fix the problems within 3-6 months; close to half of these factories still did not improve sufficiently and hence were not added to the Adidas supplier list. Compliance issues identified during initial assessments and follow-up in 2011 were lack of valid permits and licenses (13 percent), health and safety related (31 percent), and labor-related (56 percent). The SEA team did not monitor indirect suppliers. Instead, it required agents and licensees who managed the indirect suppliers to submit a three-year plan to ensure compliance in their supply chains, while commissioning external audits of the contractors. The com- pany accredited nine organizations to monitor the indirect supply chain. The SEA group worked with its agents and licensees to build and embed the SEA practices in their supply chain operations.

A HISTORY OF LABOR ISSUES IN ADIDAS In 2000, Adidas Group was accused by Urban Community Mission (UCM) of using sweatshop help in its Jakarta, Indonesia, Tuntex factory where 1,700 workers—mostly women—produced jackets and socks. UCM claimed that the workers were subjected to forced overtime, physical abuse, and poverty wages. In 2006, the company was accused by Oxfam of reneging on a promise to demand the reinstatement of 33 workers dismissed from a major Indonesian supplier following a strike. Oxfam worked to compel the company to uphold the rights of workers, including a living wage and to organize and collectively bargain. In November 2006, Indonesian factories PT Spotec and PT Dong Joe closed, leaving 10,500 workers without jobs. The factories had produced for Reebok and then for Adidas after Adidas’ Reebok acquisition. Oxfam claimed that Adidas’ buying practices led to the factory closures. The Indonesian Footwear Association reported that Adidas/Reebok had not increased payment to the

Adidas Supply Chain

Supply chain structure

Supplier

Sub-contractor

Agent

Sub-contractor

Supplier

Sub-contractor

Supplier

Licensee

Supplier

Agent

Sub-contractor

Exhibit 2 Adidas Supply Chain

Source: Adidas Group Sustainability Progress Report 2013

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suppliers over the past five years, and media outlets reported that Adidas’ 27 percent profit increase at the time was the result of the organization’s Reebok purchase, which allowed it to negotiate cheaper prices with suppliers. In 2011, workers at a Turkish factory making socks for Adidas were terminated when they attempted to form a union. Also in 2011, after 18 months of negotiation, Adidas signed the Freedom of Association Protocol in Indonesia together with national unions and several supplier factories. Nevertheless, Adidas was accused of manufacturing gear for the 2012 British Olympic athletes with sweatshop help. Workers at nine Indonesian factories that produced Olympic shoes and clothing for Adidas were allegedly working up to 65- hour weeks and earning as little as 34 Rp (1 USD) an hour. Adidas denied that clothing manufacturer workers were paid low wages, indicating that the Indonesian workers received more than double the 34 Rp an hour they claimed to be getting.

UNIVERSITY OF MICHIGAN APPAREL The University of Michigan licensed its brand to over 400 licensees that produced apparel and non-apparel products in about 40 major categories, each with several sub-categories. For example, men’s/ unisex outerwear was a product category with sub-categories of jackets, rainwear, polar fleece, and wind shirts. There were about 32 licensees in this category, including Columbia Sportswear, Cutter & Buck, and Vesi Inc. U-M licensed merchandise was sold though several channels including department stores, boutiques, stores on or near the campus, sporting goods/sports specialty, golf specialty, Internet/TV/catalog, and off-price outlets. On August 1, 2008, the university had signed an eight-year sponsorship agree- ment with Adidas for its athletic program, valued at $60 million, which agreement was now in question over the alleged violations.

UNIVERSITY LICENSING: MONITORING AND ENFORCEMENT EFFORTS Many colleges and universities depended on the FLA and the WRC to monitor and enforce code compliance and to remedy cases of egregious code violations and the failure of remediation efforts to counteract harm to workers. The FLA and the WRC served complementary roles, with the FLA acting as a monitor- ing organization and the WRC administering the complaint and enforcement processes. Students protested to ensure the integrity of their university logos. U-M was among 180 colleges and uni- versities that retained the Collegiate Licensing Company (CLC) to assist them with administration of trademark licensing programs and to promote consistent and uniform labor code standards.

Fair Labor Association Founded in 1999, FLA was a collaborative effort, a multi-stakeholder initiative that invited participation from all organizations committed to promoting fair labor standards around the world—companies and brands, civil society organizations, colleges and universities, suppliers and manufacturers, conscientious retailers, and others. Members joined FLA as Participating Companies, Participating Suppliers, or Collegiate Licensees based on size and expressed level of commitment. As FLA Participating Companies, some of the world’s largest and best-known brands had committed to insti- tuting fair labor practices and safe and humane working conditions throughout their supply chains. Similarly, FLA Participating Sup- pliers demonstrated their commitment and effort to buyers (brands)

and other stakeholders who cared about factory conditions in prod- uct supply chains. Collegiate licensees played an essential role in upholding the commitment their universities had made to protect workers’ rights worldwide. Licensees were required to register with the FLA and meet specific obligations based on revenues. By affili- ating with FLA, licensees had access to one-on-one guidance and tools, resources, and materials to help them develop compliance sys- tems that respected workers’ rights throughout their supply chain.

Worker Rights Consortium The Washington, D.C.- based WRC was founded in April 2000 by university administra- tors, students, and international labor rights experts. The WRC was created as an independent labor rights monitoring organization to assist universities with the enforcement of their labor rights codes of conduct, which were adopted to protect the rights of workers producing apparel and other goods bearing university names and logos. At the time of its founding, the WRC had the support of 44 universities. By 2012, the organization’s total number of college and university affiliates had reached 180. WRC conducted indepen- dent, in-depth investigations; issued public reports on factories pro- ducing for major brands; and aided factory workers in their efforts to end labor abuses and defend their workplace rights. The WRC also maintained a searchable online factory disclosure database that contained names and locations of factories around the world that produced goods bearing college and university names and logos.

Collegiate Licensing Company Many universities retained the Collegiate Licensing Company (CLC)—the nation’s leading collegiate trademark licensing and marketing company—to assist them with administering their trademark licensing programs, including communication of their individual university code pro- visions in a contractual agreement, the CLC Special Agreement Regarding Labor Codes of Conduct. The purpose of the CLC conduct codes was to promote consistent and uniform labor standards by providing a framework for bundling the labor code requirements of various institutions represented by CLC. The labor code standards established reasonable hours, working conditions, and pay for workers in factories manufacturing products bearing the marks of collegiate institutions. The CLC represented approximately 200 colleges, universities, bowl games, athletic conferences, the Heisman Trophy, and the NCAA (including the Men’s and Women’s Final Four, the College World Series, and all other NCAA championships). U-M consistently ranked among the CLC’s top licensed brands. (See Exhibit 3 for a listing of top collegiate licensees.)

1 University of Texas at Austin 2 University of Alabama 3 University of Florida 4 Auburn University 5 University of Michigan 6 University of Georgia 7 University of Kentucky 8 University of North Carolina 9 Louisiana State University 10 Pennsylvania State University

Source: The Collegiate Licensing Company

Exhibit 3 Top 2010-2011 Collegiate Licensees

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United Students Against Sweatshops (USAS) More than 150 chapters of USAS worked with textile worker unions to single out big-name organizations like Nike and Adidas to shine a light on the sports apparel industry’s use of sweatshop labor. Formed in 1997, Washington, D.C.-based USAS was a grassroots organization of youth that leveraged its members’ roles as students, consumers, workers, and members of campus communities to achieve precedent-setting victories in the struggle for the self-determination of working people around the world—in particular, workers who made collegiate-licensed apparel. As a result of student activism in the late 1990s, a number of U.S. colleges and universities required companies to follow labor codes at factories producing licensed goods. Reforms included a 2011 revision of the FLA’s Workplace Code of Conduct that resulted in a new minimum-wage standard found in the major- ity of individual university codes and CLC special agreements. Prior to revision of the FLA code, employers were simply required to pay the legal minimum wage or the prevailing industry wage, whichever was higher. In 2011, FLA revised the code to include a worker’s right to a regular wage that met the basic needs of the employee and two of his or her dependents, and provided some discretionary income. Students Organizing for Labor and Economic Equality (SOLE) was the student organization at the University of Michigan that had, since 1999, been affiliated with USAS. SOLE advocated for social and labor justice through direct action, education, and nationally coordinated campaigns.

U-M President’s Advisory Committee on Labor Standards and Human Rights (PACLSHR) In June 1999, then-university President Lee Bollinger responded to the anti-sweatshop movement of the 1990s by creating an advi- sory committee comprised of students, faculty, and staff. The role of the PACLSHR was to monitor code enforcement; promote university leadership in corporate citizenship with respect to fair labor practices, human rights, and sustainability in its licensing operations; advance the understanding of issues involved in glo- balization and labor; and provide advice concerning university policies and procedures to address labor issues in the production of items sold with U-M’s name, logo, or other symbols.

U-M had its own code of conduct for its licensees, but found it challenging to design effective monitoring procedures to enforce its standards. U-M consequently joined FLA and WRC for moni- toring and enforcement assistance. U-M paid each organiza- tion annual fees at a rate of approximately 1 percent of its gross licensing revenues up to a maximum of $50,000. FLA provided assistance with monitoring and improvement of policies and pro- cedures as well as investigations, while WRC offered investigation and enforcement services. Oversight on labor standards and human rights and adherence to the university code of conduct for licensed goods was accom- plished through the recommendations of the PACLSHR and SOLE to President Coleman for appropriate action (see Exhibit 4 for an example).

WORKERS’ RIGHTS AT PT KIZONE PT Kizone, an apparel factory in Tangerang, Indonesia, was owned Jin Woo Kim, a South Korean national. The plant pro- duced collegiate licensed apparel for the Adidas Group and Nike, as well as non-collegiate apparel for Dallas Cowboys Merchandising and other brands. According to WRC find- ings, PT Kizone violations began September 3, 2010, when the Indonesian manufacturer ceased paying mandatory terminal compensation to workers separated from employment. From September 3 to December 31, 2010, according to WRC, 49 workers were not paid compensation required by law and the company’s collective bargaining agreement with the workers’ union. The situation worsened when, on January 5, 2011, PT Kizone denied the factory’s workers their pay for the month of December, WRC found. Kim fled Indonesia the following month. After his departure, Green Textile—the buying agent for Nike and Adidas and the direct buyer for the Dallas Cowboys—assumed con- trol of PT Kizone operations and kept the factory operating for approximately nine weeks. Workers received their wages dur- ing that time, but at the end of March 2011 the factory ceased operations, and workers were denied any further compensation. According to WRC, when Green Textile shut down the factory on April 1, 2011, the 2,686 workers employed by PT Kizone were owed $3.4 million—an average of a year’s base income per worker (see Exhibit 5). Adidas claimed it had no responsibility

Exhibit 4 University of Michigan Students Face Off with Russell Athletic

In 2008, Fruit of the Loom subsidiary Russell Athletic shut down a 1,200-employee factory in Honduras called Jerzees de Honduras  after workers formed a union. Following the closure, investigations were performed by FLA and WRC and the findings were reported  to universities. The PACLSHR deliberated the issue and ultimately recommended non-renewal of the contract.  In fact, more than  100 universities decided to sever ties with Russell. It was the largest ever boycott of a single corporation, and it forced Russell to negotiate with the union. According to WRC, on November 14, 2009, Russell Athletic/Fruit of the Loom signed an agreement with the union representing  workers at the Honduran factory and the union’s parent federation to address labor rights violations. Russell also separately signed  an agreement with WRC to reinforce the company’s commitment to resolve the violations. The agreements were the culmination  of months of WRC investigation and remediation efforts. As of February 2011, the plant had been reopened and 820 of the 1,200  workers were rehired. As of May 2011, the remaining 380 were to be offered positions at an expanded facility under a collective bargaining agreement. The contract brought an immediate pay increase, additional hiring to ensure that all of the former workers who wanted employment at the factory were able to do so, and new investment in the factory, among other benefits.

Source: GlobaLens.com “Russell Athletic Tries to Keep the Shirt on Its Back (A)”

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for the workers because the company had advised the factory in June 2010 that it was ceasing production there, and consequently had no business relationship with PT Kizone at the time of the closure. Nevertheless, Adidas conceded in December 2011 that PT Kizone workers were involved in Adidas production until late November 2010. As of January 18, 2012, PT Kizone buyers had provided workers with approximately half of the amount WRC indicated was owed to them, including $1 million paid by Green Textile at Nike’s request and a direct contribution of $521,000 by Nike. Mandated death benefits also still were owed to the families of several employees who died between September 1 and December 31, 2010. The WRC findings, which were presented to affiliate colleges and universities, indicated that severance was owed and a code violation had occurred. WRC argued that it was the duty of the licensees to correct this violation by paying the severance. In the case of non-payment of legally mandated compensation, con- sistent with the intent of many university codes of conduct, work- ers ought to be paid what they were legally owed. Each company involved had contributed funds or pledged to do so, with the exception of Adidas. Adidas indicated that it had no obligation to provide funds to the affected workers because it did not own the factory. The company had reported taking what it called appropriate steps, including convening meetings of Indonesian and South Korean government and industry officials, and encouraging other Adidas contract suppliers in the area to hire former PT Kizone workers. Nevertheless, WRC contended that even if assistance with employment opportunities was pur- sued effectively, it would do nothing to pay workers the money they were legally owed. It was also highly unlikely that meetings involving government and industry officials in Indonesia and South Korea would result in any money being paid to the workers, WRC claimed. Adidas justified its refusal to pay the workers on two bases:

1. That it left the factory before the violations occurred 2. That it had no obligation to contribute financially in cases

where its contract suppliers failed to pay workers money they were legally owed

WRC found that the first justification had no basis. Adidas admitted that its orders were being produced at the PT Kizone factory into late November 2010. The violations began in September 2010. In both its mandatory collegiate disclosure and through its voluntary web-based disclosure process, Adidas also reported PT Kizone as a supplier factory in January 2011. Further, WRC found that the second justification had no more weight than the first. University codes of conduct required

licensees to not only ensure compliance by factories that were directly owned, but also for contractors. University codes did not exempt contractors, since the vast majority of university apparel production was outsourced. Adidas did not disclose the violations, denied responsibil- ity, and refused to pay anything. The WRC continued to recom- mend that all licensees take whatever steps were necessary to ensure that workers were paid all funds legally owed, and that Adidas reverse its position, accept responsibility, and contribute to the remediation process. U-M, the University of Washington, and UW-Madison found Adidas in violation of their codes of conduct.

Indonesian Regulatory Response Kim, the PT Kizone owner who fled Indonesia, was also the owner of one of PT Kizone’s biggest creditors, PT Selarus Kausa Busana, an apparel factory that claimed PT Kizone had owed it some $8 million. While Indonesia’s Law on Manpower (Act No. 13 of 2003) granted some level of priority to workers when their employers entered bankruptcy, other statutory provisions, specifically the country’s civil code and its Law on Bankruptcy and Suspension of Obliga- tion for Payment of Debts (Act No. 37 of 2004), established that certain other categories of creditors were privileged above work- ers. The Book of Civil Code, the basic civil law established by the Dutch colonial government in 1847, which was retained fol- lowing Indonesia’s independence, stated that liens and mortgages take precedence over any other debts, including those granted a special status, unless another law specifically stated the contrary (Article 1134). Consequently, the Indonesian courts typically held that the law should be interpreted to prioritize secured creditors above workers. Following bankruptcy proceedings, the amount that had been provisionally awarded to PT Kizone workers by the bankruptcy court amounted to only 21 percent of the $3.4 million they had claimed they were entitled to and 39 percent of the $1.8 million still unpaid. On January 19, 2012, the court-appointed receiver charged with allocating the funds obtained in the sale of PT Kizone’s assets proposed that the workers receive 3.5 billion Rp ($385,000) and that the majority of the proceeds of the asset sale be used to pay back secured creditors (a bank and a venture capital firm). In addition, a significant portion of the funds would be allocated toward debt to various government entities. On February 23, 2012, worker representatives attended a hearing at the Central Jakarta Commercial Court where the judge supervising the receiver heard and responded to challenges from the various creditors. After the hearing, the judge increased the worker alloca- tion to 6.4 billion Rp ($703,000). If the amount were paid, workers would still be owed $1.1 million.

Indonesian Rupiah US Dollars Severance and Reward Pay 26,120,052,816 2,875,720 Compensation Pay 3,918,007,922 431,358 Death Benefits 96,615,144 10,637 Resignation Benefits 611,107,767 67,281 Total Legally Owed Prior to Buyer Payments 30,745,783,649 3,384,996 Paid by Nike and Green Textile 13,815,182,160 1,521,000 Pledged by Dallas Cowboys 499,562,800 55,000 Amount Still Legally Owed 16,431,038,689 1,808,996

Exhibit 5 Details of What Was Legally Owned at PT Kizone

Source: Worker Rights Consortium. “Worker Rights Consortium Assessment PT Kizone (Indonesia) Findings,  Recommendations and Status.” 18 Jan. 2012. Washington, DC.

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Nevertheless, several creditors, including Bank SBI Indonesia and a government tax office, appealed the bankruptcy judge’s decision to the Indonesian Supreme Court. SBI Indonesia said it was owed more than the entire amount raised by the sale of the company’s assets. If the Supreme Court decided to prioritize the company’s debt to the bank according to precedent, workers would receive no funds. The workers also would have to wait for a resolu- tion. The union had not been informed of a specific timeline for the Supreme Court’s review of the case. Similar cases had taken years to resolve. (See Exhibit 6 for employees’ testimony as to their financial status).

Adidas Remains Adamant Instead of directly paying compensation, Adidas had convened meetings of Indonesian and South Korean government and industry officials and encouraged other Adidas contract suppliers in the area to consider hiring for- mer PT Kizone workers, with little effect. Adidas reported that of the 2,686 workers who lost their jobs, 300 were hired by other Adidas suppliers. Many of the job opportunities Adidas made available to the workers were located more than two hours from their homes. Among the workers who did accept jobs through Adidas, many were placed in contract positions that lasted only three months. Adidas indicated that it was investigating if food aid would be appropriate for unemployed workers, but had provided no assistance. Adidas claimed that when it discovered labor rights abuses at one of its suppliers’ factories, it was not required to take any reme- dial action so long as the company did not know of the violations at the time it placed its order with the supplier and did not place any orders after it learned of the violations. In a February 27, 2012 e-mail, Gregg Nebel, head of social and environmental affairs for Adidas Group, said to Professor Harlow, the chair of PACLSHR:

“It is the Adidas Group position not to accept responsibility for the legal duties and obligations of our business partners. Where a factory closes, or where workers are to be laid off, it is the individual factory which is responsible for the payment of severance and for any other legal benefits owed to their workers. In exceptional circumstances, however, SEA (Social and Environmental Affairs) may recommend that a sourcing entity provide emergency relief, medical

care, or other forms of humanitarian aid to workers and their families. In such cases, SEA will work with the sourc- ing entity and local NGOs to design and deliver such aid.”

Nebel indicated that PT Kizone stopped operating and paying workers’ salaries in April 2011, when the company entered bank- ruptcy, some eight months after Adidas had placed its last pur- chase order with the company and five months after its last product was shipped. Nebel also pointed out that PT Kizone was compli- ant with the law when Adidas was purchasing products from its operations.

Student Reaction SOLE called upon the PACLSHR to hold Adidas responsible for compensating PT Kizone workers or to terminate the university’s $60-million sponsorship contract with the company. “We have a code of conduct for a reason,” said Monica Shattuck, a U-M junior, member of the U-M chapter of USAS, and a member of the committee. “How can we continue to do business with a company in such blatant violation of our contract? If Adidas took our labor code seriously and wanted to fix the problem, it could pay the workers tomorrow. Unfortunately, Adidas thinks it can get away with violating our code and exploiting sweatshop labor to profit off Wolverine apparel.” U-M students met with Nebel of Adidas in March 2012 to discuss the PT Kizone issue. During the meeting, the two sides disagreed over how Adidas should compensate workers. Nebel reiterated that Adidas was not responsible for paying severance to the workers affected and that Adidas had been able to place some 300 workers in new jobs with other suppliers. Students continued to push Adidas to make the severance payments. In the meantime, the former PT Kizone workers struggled to feed their families, pay rent, and keep their children in school. In a letter to Ward, former PT Kizone employee and SPSI union worker Ahmad Supriadi wrote:

“Now as you know, we have been abandoned by the owner of PT Kizone. Over a year ago, the factory owner disap- peared without paying us . . . (what) we worked hard to earn. Since then, many of us have struggled to support our families. Without the severance payments to support us while we search for new jobs, many of us cannot pay rent. We cannot afford to eat three meals a day. We cannot keep

Exhibit 6 Excerpts from WRC Conversations with PT Kizone Workers

Budi, a 29-year-old machine operator, reports that the loss of his income has made it impossible for him and his wife to pay their two daughters’ school fees for the current year. (In Indonesia, public schools charge tuition.) While the tuition for Budi’s two children  combined is less than $10 per month, he and his wife do not have even that amount to spend since the factory closed. Budi’s wife  works, but earns less than minimum wage. The family also faces hunger. “If we could eat (properly) even once a day, we would be very grateful to God,” Budi told an interviewer. Iyam, a 32-year-old sewing operator, reports that she has searched unsuccessfully for work since PT Kizone closed. If she received the rest of her severance payment, Iyam says, she would use the money to put her daughter back into junior high school and to make badly needed repairs to her home. Saidah, who worked in the screen printing department and is 55 years old, reports that her son has completed all the coursework to obtain a high school degree — but now she cannot pay for his final paperwork. Without the high school degree her son has been working toward, she worries he will not be able to get a decent job to support himself and her as she ages. Even workers in their 30s are often told that they are too old to be hired in the garment sector; a worker Saidah’s age faces significant challenges.

Source: WRC, PT Kizone assessment.

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up with school fees, which means that our children are not allowed to study and are falling behind . . . Adidas reports that it has been working with factories to ensure that they follow appropriate procedures for closures and layoffs for 10 years, but yet Adidas did not prevent PT Kizone’s owner from leaving us with unpaid wages and unpaid severance. How many times will Adidas let this happen? How can Adidas say it is protecting workers’ rights when workers are repeatedly left with nothing when factories close . . . For us and for our children, we urge you to make sure that Adidas pays us the money we deserve.”

CONCLUSION As Harlow prepared for the meeting where her committee would decide on the recommendation it would send to President Coleman’s office, she considered the WRC and FLA documents, Adidas’ response, student comments, and worker testimony. The committee had already found Adidas in violation of the university’s code of conduct due to its refusal to provide severance and death benefits to former PT Kizone workers. The questions weighing on her mind for the committee were: Are licensees financially responsible for actions of suppliers upstream? When multiple licensees use the same supplier, should claims be apportioned across licensees, and if so, how? What should or

can universities do? Such events do occur in the extended supply chain— are there any other mechanisms to ensure that workers are protected? Finally, what should PACLSHR recommend to President Coleman?

QUESTIONS 1. What are some points and counterpoints in the debate over

“sweatshops?” That is, should manufacturers be forced to leave factories and countries that violate fair labor standards? What are the consequences of doing so?

2. If you were a student at the University of Michigan or another school, how would you feel about wearing Adidas apparel was manufactured by PT Kizone, or a similar sup- plier to Adidas?

3. Should licensees like Adidas be held responsible for what goes on in the factories in their global supply chain? If so, what do you recommend Adidas do at this point, if anything?

4. To what degree are universities and other organizations responsible for the supply chain of companies that provide apparel and other licensed goods?

5. What would your recommendation be to U-M’s President Coleman? Terminate the contract with Adidas, or not? Some other action?

This case is a revision of “PT Kizone, Adidas Battles Allegations of Shirking Responsibility to Workers,” written by Ravi Anupindi, David B. Hermelin, Ross School of Business, University of Michigan, and Mary Lowe, research associate, William Davidson Institute. Used by permission of the William Davidson Institute. It is intended to be the basis for class discussion rather than to illustrate either the effective or ineffective handling of a managerial situation. Sources: Osburn, Andrew. “Adidas Attacked For Asian ‘Sweatshops’ MEPs Told of Dickensian Conditions in Indonesia.” November 22, 2000. The Guardian. http://www.guardian .co.uk/world/2000/nov/23/andrewosborn; Aglionby, John. “Adidas ‘Fails to Act’ Over Sacked Workers.” July 6, 2006. The Guardian; Oxfam. Adidas. 2012. https://www.oxfam .org.au/explore/workers-rights/adidas; Oxfam. Inside Adidas’ Indonesian Factories. https://www.oxfam.org.au/explore/workers-rights/adidas/inside-adidasIndonesian-factories; The Independent. “Adidas Faces Protest Over ‘Sweatshop’ Goods.” July 14, 2012; Ibid; Kline, John M. “Reassuring Collegiate Anti-Sweatshop Efforts: Can University Licensing Codes Meet Workers’ Basic Needs?” Issue Primer. September 6, 2012. Engaged Ethics Initiative on Complex Moral Problems. Georgetown University; Worker Rights Consortium. “About Us.” http://www.workersrights.org/about/history.asp; Talbot, Brian, et al. “Russell Athletic Tries to Keep the Shirt on Its Back (A).” 2010. GlobaLens, a division of the William Davidson Institute at the University of Michigan; WRC, PT Kizone assessment. January 8, 2012; Nova Scott. “WRC PT Kizone (Indonesia).” Update email to primary contacts at WRC affiliate colleges and universities. June 10, 2011. Web. Accessed August 14, 2014. http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi? article52163&content5globaldocs; WRC, PT Kizone assessment. January 8, 2012; Worker Rights Consortium. “Worker Rights Consortium Report PT Kizone Indonesia Status Update.” May 15, 2012. WRC PT Kizone update. June 10, 2011.

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