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Hazard-Based Analysis: A Misguided Approach for Marketing Green

Posted on 4/7/2015 2:16:18 PM By Ujjval Vyas
  

Businesses use strategy to understand context, assess threats and opportunities, and generate options for prudent action.  In other words, they seek a bird’s-eye view of the field of engagement.  Leadership’s strategic decision—attack now, wait and see, retreat to fight another day, or capitulate—comes only after acquiring the appropriate level of information about the territory.

A decision at the scale of the territory doesn't immediately provide the needed granularity of information to put the strategic objective into effect.  Moving forwards or backwards, standing still or surrendering, all necessitate the creation of maps to get from here to there.  Deciding to go to camping in the Yukon is very different from charting the actual route and figuring out what equipment to take. 

In the basic economic theory of the firm, the three fundamental axes for making decisions and judging performance are resources, time, and information.  Marketing is how the company gets its “information” to the marketplace. Put another way, marketing is the name we give to the activity that places information into the marketplace as a precursor to the voluntary exchange that is the sale. 

The Nobel Prize-winning economist George Stigler set out first principles for understanding marketing in the context of business strategy in his legendary article entitled “The Economics of Information.”[i] In the article, he delineated the importance of sending out pricing signals into the market to decrease “search” costs (a subset of transaction costs) between buyers and sellers and, as importantly, the nature of pricing signals that are not purely about price itself.  With this analysis, Stigler set out the basis of all subsequent thinking about marketing.  As Stigler suggests, price by itself is not a signal to the market unless the market becomes aware of it.  This awareness is marketing’s key function.

A company can use advertising for much more than just telling people the purchase price of a product.  I propose expanding on Stigler’s ideas by outlining six levels of marketing information that cover both direct and indirect attributes, as shown in the following table.


marketing info

As we move down through the levels, the nature of the information transitions from factual to fanciful to fraudulent.  At the same time, all of this information has economic value because it helps buyers and sellers meet in the marketplace, albeit with varying degrees of search costs and risks borne by the parties.  In the world of sustainability, marketing has nothing to do with direct pricing information. It is all about the much slipperier world of reputation, brand identity, customer perception, and, all too often, misguided assertions and characterizations that come dangerously close to the level of misinformation.

What does all this have to do with how adhesive and sealant companies deal with hazard-based analysis (HBA)?  Quite a bit, it turns out, when marketing based on HBA becomes detached from corporate strategy. We established in the first installment of this series that HBA has no scientific or policy value. The acceptance (and often the pursuit) of HBA, EPDs, and other eco-labels is a mistake for business strategy.  Not only can it harm the company, but it also injures the industry by creating opportunistic behavior among competitors that is not based on actual value to the customer.  This decreases the overall benefits to the customer while increasing a reliance on non-value driven metrics and market skewing.

The misguided maps that marketing departments (or sustainability directors) are often drawing result from at least two major problems.  First, marketing often creates maps for sales rather than maps that comport with overall business strategy. The short-term pressure on sales teams to meet quarterly performance targets, and their resultant short-term self-interest, incentivize them to put information into the marketplace that is at odds with long-term business strategy. Second, human resources management mistakenly places a premium on staffing sustainability-linked positions with sustainability advocates instead of those capable of taking a more objective view.  Allowing advocates into the mix, or promoting current personnel who favor advocacy generates perverse incentives that allow disproportionate influence on the larger strategy.

The often-significant budgets allocated to marketing and sustainability departments create expenditures that have minimal ROI but are infinitely advantageous for the NGOs, governmental agencies, and advocacy groups demonizing chemistry and materials.  Fifty thousand dollars in sponsorship may be inconsequential to a company with multi-billion-dollar revenues, but to the advocacy organization that can now exhibit the company logo at its national conference, such an endorsement is better than gold.  For example, if Google gives money to advocates of HBA, most will imagine that HBA has somehow been vetted by this technology-driven entity.  When challenged, the advocacy group now has the basis to retort that Google thinks it is a good idea to pursue HBA and materials transparency based on the precautionary principle.

NGOs and government agencies have become masters at taking companies captive through the corporate marketing and sustainability departments.  What is not so clearly understood is that such associations lead to a form of brand damage with knowledgeable customers.  In commoditized markets with poorly informed consumers this may work very well, but in markets where customers have a wider knowledge base, such marketing maps can only be seen as cynical or deliberate activity by companies that do not want to compete on price, functionality, or other positive values.  Once a company goes down such a path, it may be difficult to recover.

We’ve already seen in the first installment of this series that hazard-based analysis is not a proper basis for business decisions. Unfortunately, marketing and sales departments are using HBA and eco-labels to make misguided claims of environmental superiority. Marketing is unaware that it could be harming the company, and strategic-level management doesn’t understand the harm that marketing is creating. If management is not careful to oversee and assure that the maps produced by marketing lead to the right place, the company may find itself in uncharted territory.

NOTE: View the first installment of this series, Hazard-based Analysis: An Incorrect Basis for Business Decisions

(Opinions in this Blog do necessarily represent the views of ASC).


[i] George J. Stigler, “The Economics of Information,” The Journal of Political Economy, Volume 69, Issue 3 (June 1961), 213–225.




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