Anticipating risk to its agricultural raw materials, Diageo has taken steps to ensure the sustainability of its supply chain. Have they done enough?
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I like your point about how crucial mindset shifts are in making this transition. As you mentioned, and I can attest to this, conservatism and complacency are rampant in the industry. While I completely agree with your recommendations, I feel the need to try to defend my former colleagues a bit.
Between the two ends of the pharmaceutical pipeline (drug discovery at the beginning and commercialization at the end), conservatism is (albeit with a few exceptions) pretty much the ruling paradigm. Change, in a world where your innovative new idea can kill someone or FDA can knock on your door tomorrow and shut you down, can be tough to stomach. Furthermore, while the people running a lot of the manufacturing and operations processes are often extremely technically proficient, that usually doesn’t apply to the kinds of technologies the industry needs to advance. So in some ways, job security (along with patient safety and regulatory compliance) is another source of inertia.
On the complacency side, I think a big part of this comes from the fact that pharmaceutical gross margins can be extremely high compared to other industries (https://www.statista.com/statistics/473429/top-global-pharmaceutical-companies-gross-margin-values/). With so much wiggle room, pharma companies might feel little pressure to invest heavily in operational improvements that could have only a small impact on their profitability. Also, short term competitive pressure around margins is, from my limited experience, pretty rare. These companies’ bread and butter comes from non-fungible products with atypical competitive dynamics that reduce the need for operational efficiencies relative to manufacturers in other industries.
In conclusion, I’m on board with your point, but I couldn’t resist giving a little justification.
I agree with your suggestions on what Starbucks should be doing about its environmental impact, but I’m really interested in this climate-change induced coffee production decline and the impact of pests like leaf rust. My hunch was that a lot more R&D is going to be needed to develop coffee plants that are resistant to both of these harmful effects. After looking at that Starbucks initiative you mentioned, it looks like it was a fairly small pilot, so I checked out some other places. Unfortunately it looks like some of these attempts have not gone so well (https://worldcoffeeresearch.org/news/coffee-leaf-rust-resistant-coffee-variety-overcome-honduras/). This article talks about how Lempira, a coffee variety that was once resistant to leaf rust, seems to have lost its resistance. This one (https://worldcoffeeresearch.org/news/starmaya-future-coffee/) talks about some other initiatives to improve coffee production through breeding and biotechnology.
If these kinds of things don’t pay off, I worry that the next resort in battling these types of diseases is increasing use of fungicides or other chemical treatments that could have secondary effects on health or the environment. As you mentioned, the economic impact of these coffee diseases can be massive. But in addition to the obvious effect on our access to coffee and coffee prices if production drops off, I’m especially concerned about the impacts on the communities that depend on coffee production for their livelihood. This is definitely an area where some serious research is needed ASAP.
I think each of the three initiatives you highlight in the short-term section make a lot of sense both in the short-term and in the long term. I’m not so convinced that their commitment to zero footprint and partnerships with organizations will have much of an impact on the company’s long-term survival, even though those efforts are noble. For Vail to stick around through the next century, I think they’re going to need to lean on investments in snowmaking, non-ski activities, and location diversification, as you mentioned. As part of these last two initiatives, my guess is that they’ll start thinking about aggressively expanding into non-mountain outdoor recreation, hospitality, and real estate.
I also like your recommendations, but I wonder how valuable a formal partnership with U.S. Ski & Snowboard and the ISF would be in terms of identifying risks. I figured that these parties understand that they have shared interests in preserving winter sports, so my assumption is that climate change information is already being shared among this community.
Another thing I was wondering is how big of an impact increased snowmaking has on Vail’s bottom line. This ESPN article has some numbers that some people might find interesting: http://www.espn.com/action/freeskiing/story/_/id/8809682/cost-snowmaking
This other article has a great discussion of snowmaking operations (what technology is required, types of machines, what factors influence efficiency, etc.): http://emsenv.com/2016/06/08/cost-to-make-snow/
The last question you raised, about how companies should think about supply chain initiatives given the four year election cycle, is fascinating and deserves a much more lengthy conversation than just this one comment. Given the huge potential for loss if the executive branch can unilaterally change the economic terms that would have previously made an investment attractive, I think it’s very important for managers in private firms to be well informed on the specifics of those political and regulatory risks.
In this case, the risks seem to hinge on the question of whether the President actually has any authority to withdraw from NAFTA, and if so, what the effects would be. While the executive branch is typically understood to have authority in the context of foreign relations, most scholars would agree that Congress has constitutional authority over trade with other nations. NAFTA has some interesting characteristics that make the debate more complex. On the one hand, much of NAFTA was implemented by Congress through a statute, so if that were the end of the story, Trump would have no authority to change the U.S.’s status in terms of its relation to NAFTA. Some scholars think that is the end of the story, and we don’t yet know who is right. At the same time, NAFTA includes a provision allowing a party to withdraw from NAFTA six months after notifying the other parties. So under one scenario, it might be possible for Trump to withdraw from NAFTA according to that provision, but we would then be left with a statute that implemented much of what NAFTA actually contains. If you take a cynical perspective, that could mean that we might continue to be bound by this statute (until Congress got rid of it), while we no longer participate in NAFTA as a party and therefore no longer receive benefits from such participation (because Canada and Mexico would not have to honor the agreement in their relations to us except to the extent that they implemented NAFTA in their own internal governance). That is an unlikely scenario, as Congress would probably (hopefully?) step in at some point to either prevent this kind of thing from happening or clean up the mess if it did happen.
Here are some other people’s take on this question:
https://www.vox.com/policy-and-politics/2017/10/26/16505508/nafta-congress-block-trump-withdraw-trade-power
http://thehill.com/blogs/pundits-blog/international-affairs/346744-trump-cant-withdraw-from-nafta-without-a-yes-from
https://www.theatlantic.com/politics/archive/2017/04/trump-nafta-withdrawal-order/524463/Sorry for going down that rabbit hole, but my main point is that managers making huge investment decisions should understand the political risks and the different scenarios that could arise out of these complex international relations.
I was intrigued by your comments on the impacts to the UK dairy supply chains. I agree with your point that Tesco and others will likely be forced to source more locally, but I think some of the impacts of potential new dairy tariffs (going both directions) might be pretty complex and the local industry might not be quick to scale up. Looking at this report (https://ahdb.org.uk/brexit/documents/Dairy_bitesize.pdf), it seems like some short term options might be turning more to Canada, the US, Australia, or New Zealand for cheese, while New Zealand in particular might try to compete with local butter producers for share of the UK market.
At the same time (and consistent with most of your points), attempts to strengthen local butter and cheese production might take a long time. It seems that the majority of UK milk and cream exports go to Ireland, where it is processed and ultimately imported back into the UK as finished products (e.g. butter and cheese). I’m not sure how quickly the UK dairy industry can scale up its dairy processing capacity, but it seems like they would have to do so quickly to keep up with demand since Ireland has been serving this function for a long time.