CEO of Danone Learns That Being Good is Not Good Enough
The next big theme is about how Danone’s CEO has just learned that being good is not good enough. If you follow the saga of Danone, it has branded itself as the socially responsible consumer packaged goods company, or as they call it outside of the Western Hemisphere, fast-moving consumer goods company. That’s not to say that Danone is more socially responsible than its other major competitors. No, it’s just branded itself this way. It’s taken this flag of social responsibility and draped it around itself and told everyone, “This is what we’re going to do.”
But Danone has not done very well. Its share price is trailing peers. It’s PE ratio is trailing peers, and activist shareholders have stepped up and said, “Hold on a second. You’re not doing well. We want the CEO to go.” That’s basically what happened—the CEO has been released.
Here’s the question: Was the CEO let go because he pursued a socially responsible corporate agenda? Or because he pursued it in a suboptimal way? And what does that mean for the world? What does it mean for strategy?
Danone’s peers are also pursuing a socially responsible strategy. They may not have branded themselves that way, but that’s what they’re doing. But they’re making money, and they’re making more money and at higher margins than Danone. Now, the question becomes: If the media and the world think that the CEO was fired because he’s pursuing a socially good agenda, is that really the case? It’s most likely not the case.
There are two quite important insights. First, at the beginning of the socially good theme that swept across the world, it was enough to say, “I’m pursuing a socially responsible agenda,” and the world would reward you for that. But now when almost everyone is pursuing a socially responsible agenda, you’re not going to be rewarded on whether you are just doing it—you’re going to be rewarded on whether the agenda is working. And if it’s not working, it doesn’t mean the agenda is wrong—it means that the group of executives leading it just haven’t figured out how to make money doing it. The question becomes, should investors wait for them to figure it out? Or should investors bring in another CEO to figure it out? The telling thing is, when you speak to these investors, they tell you clearly, “It’s not that we don’t like the socially responsible agenda. We don’t like the way it’s being done.”
The second insight is quite interesting. When companies incorrectly pursue a socially responsible agenda—and many companies do this—they don’t develop fabulous products and reconfigure their product and supply chains to be socially responsible in a cost-effective way. No, they just say they’re being socially responsible and raise their costs, or they do it in such a way that the share price tanks. Now, this is important. If a company becomes socially responsible and its costs go up, but other socially responsible companies in that sector are able to be socially responsible and keep their costs the same or lower their costs, what is the company that hasn’t figured out its cost equation going to do? Is it going to pass it on to consumers or is it going to eat the costs?
If it passes on to consumers, why would a consumer buy from a company that’s doing exactly what another company is doing but is charging more for it? If a company eats the cost, that means it doesn’t pass it on to consumers, but it lowers its margin and has less money to invest in innovation.
So, it’s not enough to say you’re being socially responsible anymore. You have to figure out how to do it in a way where you can create fabulous products at the right price point because being socially responsible is not good enough anymore. On the other hand, let’s assume it built a new supply chain, a new product structure and a new product mix. It got the pricing and everything right. So, it’s not passing on costs to consumers anymore. It’s able to be cost effective, but the products are not great. They’re socially responsible and cheaper, but they’re not great. What’s going to happen then?
You then pass on a cost to your investors because your share price tanks. So, companies are caught in the socially responsible maze and they don’t know how to do it. Many of them are doing it just because it sounds good. They’re going to have to make a decision here: “Am I going to pass the cost to the consumer? Or am I going to pass the cost to the investor?” The easy answer is don’t pass your cost to investors because they’ll have you replaced. But there’s no easy answer. If you pass the cost to consumers, you’ll lose consumers.
So, if you go down the socially responsible route, don’t say you’re being socially responsible and assume that’s the only reason people are going to buy from you. It was good to do that five years ago. Today, as companies figure out how to do good and produce great products, you’re competing against those companies. They figured out everything. Just saying you’re socially responsible is not going to be good enough. The question is: How are you going to do this? Where are you going to make your big play? How are you going to manage things?
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #21. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.
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