Public Sector Unions

In 2011, there was a showdown between public-sector unions and the state of Wisconsin when governor Scott Walker introduced a bill that proposed to end collective bargaining for state workers (except for base wage rates), required unions to hold recertification votes annually, and curtailed the practice of withholding union dues from employee paycheques. Despite noisy protests by state workers, the bill passed. Other U.S. states (for example, Ohio, Michigan, and Indiana) were also considering changes to their labour legislation.    

How relevant are these developments for Canadian labour unions? It depends who you talk to. Supporters of unions note that when the province of B.C. tried to throw out a collective agreement with health care workers in order to save money, the Supreme Court of Canada decided that collective bargaining in the public sector is a constitutional right. Supporters also point out that Canadian society has always been much more group-oriented and less individualistic than U.S. society, and thus more favourably disposed to unions (71 percent of public-sector workers are unionized in Canada, but only 37 percent are in the U.S.).  Union density in northern U.S. states is typically much like that found in Ontario, but much lower in the southern states. In other words, the real dividing line is not the Canadian-U.S. border, but the Mason-Dixon line (which is often viewed as the line separating the “northern” and “southern” cultures in the U.S.).

Critics of unions counter these arguments and say that taxpayers are becoming increasingly fed up with what they perceive to be the “rich” benefits that are available to public sector workers. For example, federal workers usually have a defined benefit pension that, after 35 years, pays 70 percent of the worker’s highest five-year earning average. By contrast, in the private sector, two-thirds of workers don’t even have a pension, and those that do usually have a defined contribution pension, so their pension value is determined by how well the stock market performs. Pressure is already being put on Canadian public sector unions. In Toronto, for example, Mayor Rob Ford wants to privatize garbage collection to reduce costs and to avoid problems like the 39-day strike of garbage collectors a few years ago. Also, provincial premier Dalton McGuinty is trying to push through legislation that takes away the right to strike from Toronto transit workers. Attempts are being made in Saskatchewan to “rebalance” the ratio between unionized and non-unionized government workers, and Quebec wants to reduce pension payments to public-sector retirees. 

Questions for Discussion

1.  Do you think that the pressures that are being put on public-sector unions in the U.S. will also develop in Canada? Support your conclusion.

2.  Consider the following statement:  The rich benefits that members of public-sector unions receive must be reduced. It is not fair that public sector workers are given pensions that are so much better than private-sector workers. Do you agree or disagree with the statement? Defend your answer.    

Sources:  Kris Maher, “Unions Push to Undo Ohio Law,” The Wall Street Journal, June 3, 2011, A5; Konrad Yakabuski, “Will Wisconsin’s Chill on Labour Move North?,” The Globe and Mail, March 12, 2011, p. F1; Paul Vieira, “Public Spat; The Battle Boiling Over in Wisconsin Simmers in Canada,” National Post, March 5, 2011, p. FP1; Howard Levitt, “Are Unions Losing their Purpose?; Law Affords More Protection to Employees,” National Post, July 8, 2009, p. FP12.

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Scandal At News Corp.

During the last decade there have been several high-profile examples of ethical lapses at business firms. The most recent of these was a hacking scandal in July 2011 at the British tabloid News of the World, which is published by Rupert Murdoch’s Media Corp.

News of the World reports on all sorts of gossip about individuals, and was Britain’s best-selling Sunday paper until it was revealed that some of its reporters had hacked into the cellphones of private citizens. The public was particularly outraged about the case of a 13-year old girl who was kidnapped and murdered. While she was missing, a reporter at News of the World hacked into her voicemail and deleted messages. This led her parents to think that she was still alive. The cellphones of military personnel who were killed in Iraq and Afghanistan were also hacked.

The scandal caused the market value of News Corp. to drop more than $5 billion. As well, a planned takeover of television network BSkyB by Media Corp. was abandoned. Many well-known companies (Ford, Lloyd’s of London, Cadbury, and Vauxhall) pulled their advertising from News of the World. Two top executives also resigned: Rebekah Brooks (CEO of News International) and Les Hinton (CEO of News Corp.’s Dow Jones & Co., which publishes The Wall Street Journal). Shortly after the scandal broke, it was announced that News of the World would cease publication. 

When Rupert Murdoch and his son James (the CEO) appeared before the Culture, Media, and Sport Committee of the British Parliament, they both apologized for what had happened, but denied knowledge of the hacking. Rupert Murdoch said that his company was so big that he couldn’t know about all the details of what was going on. He said that he wasn’t much involved in the paper’s management because it was such a small part of his media empire. He admitted that he had not looked closely enough into the activities of some of the paper’s staff, but he denied responsibility for what had happened because subordinates that he trusted had lied to him.       

In the aftermath of the scandal, allegations were made that Andy Coulson, an editor at the tabloid when the hacking took place, knew that illegal payments had been made to police officers who provided information to reporters for stories they were writing. The story then took on strong political overtones, since Coulson had been appointed as the Prime Minister’s communications director after he resigned from the paper.

**Questions for Discussion**

Assess this situation using the four ethical norms that are discussed in your text. What conclusions can you reach about the level of ethics that were evident in this situation?

In his testimony before the British parliament, Rupert Murdoch admitted that he had not paid very close attention to the day-to-day activities at News of the World, but he also said he was not responsible for what had happened. Is this a reasonable position for a top manager to take when something goes wrong?

**Sources**:  Mark Hosenball, “Coulson Tied to Payouts, Insider Says; Emails Suggest Ex-Editor Knew of Police Bribes,” National Post, July 22, 2011, p. A10; James Kirkup, “‘Lost Sight’ of Paper: Murdoch; ‘Clearly’ Lied to,” National Post, July 20, 2011, P. A10; Keith Weir, “Murdoch Apologizes, Top Aides Quit; ‘Deeply Sad Day’; Rebekah Brooks, Dow Jones CEO Both Resign,” National Post, July 16, 2011, P. A18; Steve Ladurantaye, “A Kingmaker in Damage Control Mode,” The Globe and Mail, July 16, 2011, p. A3; Elizabeth Renzetti, “Who Will Mourn News of the World? The Taxi Drivers, Hairdressrs and Café Owners,” The Globe and Mail, July 9, 2011, p. F3; Eric Reguly, “Hacking Scandal Kills U.K. Tabloid,” The Globe and Mail, July 8, 2011, p. A1; Susan Krashinsky, “Bad News for News of the World,” The Globe and Mail, July 7, 2011, p. A11; Kate Holton and Jodie Ginsberg, “Murdoch Will Co-operate with Hacking Inquiry; Faces Boycotts,” National Post, July 7, 2011, p. A13.

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Social Media and Reputation

Forces in a company’s external environment (e.g., consumers, suppliers, competitors, pressure groups, technology, etc.) can have a big influence on a company, including its reputation with its stakeholders and with the general public. For example, consumers’ perceptions of a company’s reputation can influence their buying decisions. Managers want their company to have a good reputation in the eyes of consumers, so they keep an eye on the results of “corporate reputation” surveys like The Most Respected Corporations in Canada published by KPMG/Ipsos-Reid, and the Global Pulse ranking published by the Reputation Institute of New York. These rankings are based on surveys completed by managers and company stakeholders who give their opinions about how well companies are doing on issues like innovation, governance, leadership, customer service, and corporate social responsibility.

Where companies are placed in the rankings is being increasingly influenced by a relatively new external force: social media like Facebook, Twitter, and YouTube. These social media have created a dilemma for managers. On the one hand, they are very popular with consumers, and if they happen to generate positive “buzz” about a company, that will likely enhance the company’s reputation. On the other hand, social media can also rapidly disseminate negative information about a company, and that can harm its reputation. (Note: Just as social media are facilitated by new technologies, so also is the tracking of company reputations. For example, Radian6 is a New Brunswick-based company that develops software which helps companies track what is being said about them online in social media such as Twitter and Facebook. The company has 2,200 clients, including well-known ones like Dell, Pepsi, Microsoft, Kellogg’s, and Sony Ericsson.)

Dave Jones, the vice-president for digital communications at Hill & Knowlton, says it can be difficult for a company to know how to respond to repeated bashing from, say, an environmentalist on a blog. Should the company respond to the charges, or just ignore them? Consider how three companies responded to negative publicity that appeared in social media:

  • Tim Hortons is a highly visible and successful Canadian company that is trying to make inroads in the U.S. market. As part of its strategy, it agreed to be one of the sponsors of a family-oriented event in the U.S. which was run by a group called The National Organization for Marriage (NOW). When it was discovered that the event was part of NOW’s opposition to the legalization of gay marriage, the story developed into an online controversy. Within a few days Tim Hortons withdrew its support, and bloggers took credit for squelching the sponsorship. This incident demonstrates how negative publicity about a company can quickly spread. To complicate matters further, another segment of the population was probably unhappy that Tim Hortons withdrew its support for the event. You can’t win, it seems.
  • In 2011, a lawsuit was filed against Taco Bell by an unhappy customer who claimed that there was more filler than beef in the company’s tacos. When news of this lawsuit began spreading rapidly on the internet, the company decided it had to respond immediately to the threat. It developed Facebook postings and a YouTube video which pointed out that the taco mixture is 88 percent beef, not the 35 percent claimed in the lawsuit. Taco Bell also took out a full-page newspaper ad which had the aggressive headline “Thank You for suing us.” Although it is too soon to tell what effect the lawsuit will have on the company, Taco Bell says that the response to its advertisements so far has been positive on both Facebook and Twitter.
  • In a recent Reputation Institute survey, telecom giant Rogers ranked near the bottom of the list. Keith McArthur, the company’s director of social media, recognizes that while Rogers is one of the most talked-about companies in Canada, the talk is not always positive. He therefore developed a team of social media specialists to increase the company’s social media presence. It now has a corporate blog to host conversations about the company and its products. These activities cost money, however, and any company that goes this route needs to know if the money is well spent. Will the company move up the Reputation Institute’s ranking next time around?

Amber MacArthur, an online journalist who covers tech and social media developments for CBC and CityTv, thinks that Canadian businesses are lagging behind their U.S. counterparts in the use of social media. She does mention some exceptions (for example, Nissan’s Cube Competition and RBC’s student podcast which teaches young people how to manage their money). She says that huge numbers of consumers are using social media, but Canadian businesses aren’t yet capitalizing on that. One of the problems may be that it’s hard to figure out how effective social media are in boosting the company’s reputation (of course, the same thing could be said for traditional advertising).

The impact of social media is not limited only to corporate reputations. In The New Social Learning, authors Tony Bingham and Marcia Conner say that all the hype about social media misses its key application: organizational learning. Social media allow collaboration between companies and consumers, and that will help companies capitalize on opportunities that their competitors may not even recognize. Companies that use social media effectively will be the most nimble and responsive to consumer needs, and therefore the most successful (and perhaps have a good reputation as well).

**Questions for Discussion**

  1. What other forces in the external environment can influence a corporation’s reputation? Give an example.
  2. Contrast the responses of Tim Hortons and Taco Bell to the negative online publicity they received. Which response do you think was the most effective? Defend your answer.

**Sources**: Quentin Casey, “Measure of Success,” National Post, April 4, 2011, p. FP1; Julie Jargon, Emily Steel, and Joann S. Lublin, “Taco Bell Makes Spicy Retort to Suit,” The Wall Street Journal, January 31, 2011, p. B5; Steve Cunningham, “Social Media Will Transform Businesses into Learning Organizations,” National Post, September 28, 2010, p. FE7; Jordan Timm, “Branding by the Masses,” Canadian Business, April 27-May 10, 2010, p. 34.

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Strategy at Bombardier

Montreal-based Bombardier is a world leader in the production of commercial jets, business jets, and trains. Bombardier’s fortunes are often influenced by political decisions made by governments, so developing corporate strategy is difficult. For example, Bombardier and Brazil-based Embraer have repeatedly charged each other with violating World Trade Organization rules about receiving government subsidies from their home governments. Bombardier and Embraer both have incentives to support protectionism in their home country and free trade everywhere else.

Bombardier is aggressively pursuing customers in two distinct markets: business jets and commercial jets. In the business jet market, Bombardier’s current product offering is the Global Express XRS high-end jet. But in order to compete with U.S. rival Gulfstream Aerospace, Bombardier is planning to spend more than $1 billion to develop two new, ultra-luxurious, long-range business jets which are derivatives of the Global Express. The Global 7000, which is slated for delivery in 2016, will be 20 percent wider than Gulfstream’s G650 (but the G650 will come on the market in 2012). The Global 8000 is designed to compete on distance, and will fly slightly faster than the G650. The business jet market has been very uncertain since the financial downturn in 2008.

In the commercial jet market, Bombardier is developing the CSeries jet, which is designed to compete in the 100-150-seat segment of the market. The new jet will have advanced avionics, new wings made of composite materials, and a fuselage made of a lithium-aluminum alloy. There are actually two planes in the series: the CS100 (which seats 100-124 people) and the CS300 (which seats 120-145 people). This market segment has been shrinking, but airlines may still buy as many as 6,000 planes like these during the next 20 years.

Bombardier also has taken out patents on the CS500, which could seat even more people. With its new entries, Bombardier feels that it can successfully compete against planes made by Airbus and Boeing, the two giants in the industry. AirInsight, an aviation consultancy company, recently released a report showing that the CSeries aircraft will have advantages over both the Airbus A319neo and the Boeing 737. If an airline like Southwest replaced its aging Boeing aircraft with Bombardier aircraft, that could mean a $1.85 billion benefit for Bombardier. But Boeing and Airbus could also respond to the CSeries threat by lowering prices on their planes. Since they are much larger companies, Bombardier could probably not meet their prices. Airbus A320 planes will also have a new, more fuel-efficient engine by 2016 (but this is the same engine that will be used by Bombardier in its CSeries planes, so Airbus will probably not have a competitive advantage there).

Pierre Beaudoin, president and CEO of Bombardier says when you invest in airplanes, you can’t look at today; you must look well into the future. Developing a new product is risky because of the complexity of the product, the long time frame needed for its development, and the high cost of each unit (for example, the new CSeries jets will sell for about $65 million each).

**Questions for Discussion**

  1. What are the various levels of strategy that exist in a business firm?
  2. What corporate-level strategy is Bombardier pursuing? Defend your answer.

**Sources**: Greg Keenan, “Bombardier’s Next Jet Faces New Hurdle: Cutthroat Prices,” The Globe and Mail, December 7, 2010, p. B1; Scott Deveau, “Build Larger CSeries, Bombardier Advised; Air Insight Report; Option of 150-Seat Version Could Steal Clients from Boeing,” National Post, December 7, 2010, p. FP7; Bertrand Marotte, “Bombardier Sticks to Business-Jet Plan,” The Globe and Mail, December 3, 2010, p. B3; Greg Keenan, “Airbus Turns Up the Heat on Bombardier, Boeing,” The Globe and Mail, December 2, 2010, p. B3; Barry Critchley, “Bombardier Spices Up Orders for Indian Market; $390M Deal in Works,” National Post, November 3, 2010, p. FP2; Bertrand Marotte, “Bombardier Plans Two New Business Jets,” The Globe and Mail, October 20, 2010, p. B5; Laura Cameron, “For Bombardier, A Case of Déjà Vu,” Canadian Business, September 13, 2010, p. 28.

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The Overtime Controversy

Here is an interesting question: Should managers receive overtime pay? Under the terms of the Canada Labour Code, individuals in supervisory roles are not entitled to overtime pay for work beyond 40 hours per week. But this provision was challenged a few years ago when a manager at Nygard International Ltd. filed a complaint with the Manitoba Labour Board arguing that she should have been paid overtime for the extra hours that she was required to work. The Board ruled in her favour and awarded her $10,000 in overtime pay. The company appealed the case to the Supreme Court of Canada but lost. Soon after, however, the province of Manitoba passed legislation that exempted managers from overtime pay rules in labour laws.

But that isn’t the end of the debate. Now, an overtime class action suit has been filed by first-line supervisors at Canadian National Railway who say they work 50 hours a week on average, and sometimes as much as 90 hours per week. One of the important issues in this case will be a determination of whether the first-line supervisors are properly classified as “managers” and whether they actually have managerial duties. The resolution of this lawsuit is months away, but if the judge hearing the case decides that the supervisors are not actually managers, CN could owe millions of dollars in overtime.

The Nygard and CN cases should not be confused with overtime class action lawsuits that have been filed by non-management workers. Several years ago, for example, KPMG was sued by non-management employees who claimed they were not paid for overtime hours that they worked. Once KPMG realized it was not in compliance with overtime laws, it made overtime payments to the employees. In 2010, non-management workers at the Bank of Nova Scotia filed a class action lawsuit claiming that they were not paid for overtime that they had worked. But a similar class action overtime lawsuit against the Canadian Imperial Bank of Commerce was not allowed to go forward when the Ontario Divisional Court ruled that the case was not appropriate for a class action lawsuit because there were not enough common issues among the 31,000 tellers at the bank.

**Question for Discussion**

  1. Should managers be paid for overtime work? Defend your answer.

**Sources**: Daryl-Lynn Carlson, “Overtime a Laborious Issue,” National Post, October 27, 2010, p. LP4; Jim Middlemiss, “Hurdle for Overtime Class-Action Suits,” National Post, September 15, 2010, p. FP8; Barry Critchley, “Managers at Centre of CN Class Action; Overtime at Issue; Judge to Rule on Whether Supervisors are Management,” National Post, August 18, 2010, p. FP2; “CIBC Staffers Seek OK for Overtime Group Suit,” The Globe and Mail, December 9, 2008, p. B10; Jim Middlemiss, “Lawsuit Seeks OT for Bankers; CIBC Targeted,” National Post, October 29, 2008, p. FP1; Virginia Galt, “Managers’ Overtime Victory Short-Lived,” The Globe and Mail, April 20, 2007, p. B3.

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Promoting A Green Business Image

In recent years, many Canadian businesses have begun actively promoting themselves as “green” enterprises. They are doing this because the market for green products has increased rapidly as consumers have become more concerned about the environment. For example, the image of Canada’s oil sands producers is that of environmental “bad boys,” so the companies have banded together to get out the word that they are investing in new technology that will reduce the impact of oil sands activity on the air, land, and water. The campaign includes a new website and a national advertising campaign which is designed to provide information and correct misperceptions that consumers may have about oil sands development.

Even companies that have a good reputation for being green are stepping up their efforts. Body Shop unveiled a major advertising campaign in 2008 that aggressively touted its commitment to having a corporate culture of concern for the environment. The company is advertising because its competitors are touting their commitment to the environment, and Body Shop wants to stand out from the crowd.

But convincing customers that a business is green is becoming increasingly difficult because consumers have become quite cynical, and because watchdog groups carefully scrutinize green claims that are made by companies. A Gandalf Group survey of 1500 Canadians found that the majority of consumers think that (a) environmental claims by businesses are just a marketing ploy, and (b) labeling regulations are needed so buyers can understand what terms like “eco-friendly” mean. These consumer attitudes have developed partly because some companies have tried to claim that their products are more eco-friendly than they really are.

The term greenwashing has been coined to describe the practice of making false or exaggerated claims about the environmentally-friendly features of a product or service. It is a modern variation of the older term whitewashing, which means making things look better than they actually are. EnviroMedia publishes a Greenwashing Index that ranks the eco-friendly advertising claims of various companies.

In 2010, the environmental marketing firm TerraChoice conducted a study of 5,296 different products and found that 95.6 percent of them made at least one false or misleading environmental claim. Children’s toys and baby products were the worst, with almost all of them making at least one misleading claim. TerraChoice also found that green claims are getting more frequent. Between 2009 and 2010, for example, the claim of “BPA-free” increased by 577 percent, and the claim of “phthalate-free” increased by 2,250 percent. The use of fake labels (which purport to show that a recognized third party has certified a product as environmentally-friendly) is also on the increase (up from 23.3 percent in 2009 to 30.9 percent in 2010). These fake logos are available for a fee on the internet

TerraChoice identified several basic greenwashing sins; these include (a) hidden tradeoffs (a company plays up an environmental issue where they do well, but ignores other potentially more serious issues where they don’t do well), (b) vagueness (an environmental claim is made, but it is so vague that it is meaningless), (c) lack of proof (no proof is provided for a green claim), (d) false labels (the use of fake certification logos to impress consumers), and (e) irrelevance (a company plays up an environmental issue that is not addressed by the company’s product). The news is not all bad, however. TerraChoice found that labels with accurate green claims were increasingly evident, and that greenwashing was less evident for products that were certified by a legitimate third party.

Charges of greenwashing can create problems for companies. For example, the World Wildlife Fund (WWF) accused Shell Oil of greenwashing after Shell advertised that its Albert oil sands operations were “sustainable.” The WWF filed a complaint with the U.K.’s Advertising Standards Authority, which ruled that the advertisement was misleading and confusing to consumers. The WWF publicized the ruling (and made critical comments about Shell) on a large digital billboard in central London.

Another oil company that has had difficulties is BP. Its slogan “Beyond Petroleum” promotes its green image, and the company has been praised by the Natural Resource Defense Council in the U.S. as a leader in the industry’s move toward renewable energy. BP has made a concerted effort to market itself as being environmentally friendly, and consumers seemed to have had a positive view of the company. But all that changed as a result of the oil spill disaster in the Gulf of Mexico in the summer of 2010. Intense media coverage of the disaster, as well as allegations that the company did not put enough emphasis on safety (for both workers and for the environment) damaged BP’s green image. BP is also involved in extracting oil from the Alberta oil sands, which Greenpeace has called “the greatest climate crime in history.”

Some green advertising campaigns may strike consumers as downright outrageous. Much to the dismay of animal rights activists, the Fur Council of Canada (which emphasizes its ties with Native Canadians and its made-in-Canada attributes) has promoted itself as a green industry. Its billboard and print advertisements stress the sustainability of the fur industry, and point out that trappers are the first to sound the alarm when wildlife habitats are threatened. The trapping industry has endured much negative publicity during the last couple of decades, so the advertising campaign was controversial.

In response to concerns about greenwashing, the Canadian Competition Bureau, in cooperation with the Canadian Standards Association, has drafted industry guidelines that will require companies to back up their environmental claims with scientific evidence. Laws prohibiting misleading advertising already exist (for example, Lululemon Athletics Inc. was required to remove unsubstantiated claims about the health benefits of seaweed from one of its clothing lines), but environmental claims are difficult to assess since there are no consistent definitions and standards that can be used to judge whether a product is really eco-friendly. The new guidelines will create national definitions for terms like “recyclable” and will also prohibit vague claims about products (for example, “our product is non-toxic”).

Questions for Discussion

  1. What is your reaction to the Fur Council of Canada’s green advertising campaign? What would you say to an animal rights activist who is outraged at the claims the Fur Council is making?
  2. Consider the following statement: The Competition Bureau’s plan to create national guidelines to define terms like “recyclable” is well-intentioned, but it will not work in practice because companies will figure out ways to get around the rules and still make unwarranted claims about how “green” they are. Do you agree or disagree with the statement? Explain your reasoning.
    1. Sources: Sara Schmidt, “Public ‘Greenwashed’ by Eco-Friendly Claims: Study,”//Winnipeg Free Press//, October 26, 2010, p. A2; Hollie Shaw, “Making the Case that Wearing Fur Can Be Eco-Friendly,” Winnipeg Free Press, December 5, 2008, p. B6; Daryl-Lynn Carlson, “Advertising Guidelines Target ‘Greenwashing’,” Winnipeg Free Press, November 21, 2008, p. B6; Marina Strauss, “Standing Out in a Sea of Green,” The Globe and Mail, August 16, 2008, p. B3; Randy Boswell, “Oilsands Ad ‘Greenwash’ Environment Group Crows,” The Globe and Mail, August 14, 2008, p. C8; Richard Blackwell, “Eco-Friendly? Canadians Want to See the Proof,” The Globe and Mail, July 28, 2008, pp. B1, B3; Shawn McCarthy, “Oil Sands Tries Image Makeover,” The Globe and Mail, June 24, 2008, pp. B1, B7; Sharon Epperson, “BP’s Fundamental But Obscured Energy Contradiction,” cnbc.com, May 21, 2008, www.cnbc.com/id/24758394; Carly Weeks, “New Scrutiny for Green Claims,” The Globe and Mail, March 11, 2008, pp. B1, B6; “Oil Company BP Pleads Guilty to Environmental Crime,” International Herald Tribune, November 29, 2007, www.iht.com/articles/ap/2007/11/30/business/NA-FIN-US-BP-Settlement-Alaska.php?page=1; Terry Macalister, “Greenpeace Calls BP’s Oil Sands Plan An Environmental Crime,” Guardian.co.uk, December 7, 2007, www.guardian.co.uk/business/2007/dec/07/bp.

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Crisis Management at BP

On April 20, 2010 a drilling pipe snapped in two during deep water drilling by BP in the Gulf of Mexico. A blowout preventer (BOP) was supposed to shear off the broken pipe and seal the well to prevent oil leakage or an explosion, but the BOP failed. An explosion then rocked the Deepwater Horizon drilling rig, and in the ensuing fire, 11 workers were killed and large volumes of crude oil began spewing into the Gulf of Mexico from 1,600 metres below the surface. BP suddenly had a major crisis on its hands.

Managing the Crisis

In the days immediately following the accident, Tony Hayward, the CEO of BP was calm and relaxed as he dealt with reporters’ questions about the oil spill. He assured them that BP had great technical expertise in this area and large financial resources to fix the problem. He set up a special headquarters in a Ramada Inn in Louisiana to manage the crisis, he took full responsibility for the spill, and he brought in technicians and engineers to work on the problem. He also kept the U.S. government informed about progress. But after several failed attempts to stop the flow of oil, things started to go downhill for Hayward. The major television networks gave the spill prominent coverage night after night on their evening news programs. Viewers regularly saw dramatic images of animals and birds covered with oil, and shorelines, beaches, and marshes fouled with oil. Reporters also interviewed politicians, ecologists, commercial fishermen, and tourists, all of whom expressed poignant concerns about lost jobs, the damage to the tourist industry along the Gulf Coast, and BP’s inability to stop the flow of oil.

As the negative publicity about the spill increased, Hayward began to realize that BP was facing not only a technical problem in stopping the flow of oil, but a huge public relations problem as well. In fact, BP was facing the biggest public relations crisis ever faced by an oil company. The situation was worsened because Hayward made several major gaffes and strategic communication errors during the next few months. For example, he said the spill wasn’t BP’s fault; instead, he blamed Transocean, the company that operated the drilling rig. He also said the dangers of the spill were being exaggerated, and that there was no underwater slick of oil. In its press releases, BP consistently underestimated the amount of oil that was leaking. A figure of 5,000 barrels per day was initially cited, but independent sources later put the amount closer to 60,000 barrels per day. Hayward also said that the environmental impact of the spill was actually quite small. His most unfortunate (and widely quoted) remark was that the spill had caused him a lot of stress and that “he wanted his life back.” Someone then observed that the wives of the men who were killed in the blast wanted their husbands back. It also didn’t help when U.S. President Barack Obama said that he wouldn’t want Hayward working for him. Michael Gordon, of Group Gordon Strategic Communications, a crisis public relations firm, says that BP’s public relations communication is a great example of how to make a bad situation worse. He says the company lacked transparency in its communication, didn’t talk straight, and wasn’t sensitive to those who were negatively affected by the spill.

As the public relations problems worsened for BP, day-to-day control of the crisis was given to Bob Dudley on June 23, 2010. He was previously head of BP’s joint venture with a Russian oil company. In late July 2010, BP fired Hayward as its CEO and Dudley, the first non-Briton to head BP, was announced as Hayward’s replacement. BP also promised to become a company that was much more focused on safety. Dudley’s job is to restore BP’s credibility and reputation, and one of his top priorities will be safety. But critics said an outsider should have been appointed if the company really wanted to change its culture. In commenting on his dismissal, Hayward said that he had been demonized by the media, and he realized that BP could not move forward until a new CEO was appointed.

As days and weeks passed and the oil continued to escape into the Gulf of Mexico, more unfavourable information came out about the spill. A Wall Street Journal investigation found that several questionable decisions had been made that contributed to the blowout of the well: (1) BP cut short a procedure that was designed to detect gas in the well and remove it; (2) a quality test was skipped that would have shown whether cement that had been placed around the drilling pipe was properly poured to prevent a blowout; (3) workers prematurely removed heavy drilling fluid (called “mud”), which keeps volatile gas from escaping from the well; (4) the BP manager overseeing the well didn’t have much experience in deep water drilling; and (5) in an attempt to reduce drilling costs, BP installed only 6 centering devices instead of the 21 that had been recommended (centering devices reduce the risk of gas escaping from the well and exploding). One employee of Transocean also claimed that an alarm system that would have warned workers of impending danger had been disabled before the blowout. Transocean denied the allegation, and there has been some inconsistency in witness testimony about this claim.

More negative information about BP’s environmental and safety record also came to light as oil continued to spew into the Gulf of Mexico. In 2005, for example, an explosion at BP’s Texas City refinery killed several workers. And in 2006, BP had an oil spill in Alaska. All of this negative publicity caused BP’s share price to drop by one-third, and its market capitalization to drop by $100 billion as investors began to realize that BP would likely face many class action lawsuits over the spill. These lawsuits and other fines may total $40 billion or more. BP’s credit rating was cut to just above “junk” level by Fitch Ratings because of the possibility of long-term liabilities associated with the cleanup. By the end of June 2010, BP’s stock price had dropped to a 14-year low. Its second quarter loss was $17.1 billion. In August 2010, BP finally succeeded in capping the well and stopping the flow of oil.

The BP spill triggered congressional hearings in the U.S., and executives from BP, Exxon, ConocoPhillips Ltd., Chevron Corp., and Royal Dutch Shell PLC were grilled by U.S. legislators about their safety plans for deep water drilling. Legislators expressed concerns that oil companies have shoddy safety practices, and that they don’t spend enough on new technologies for cleanup when a disaster occurs. President Obama imposed a six-month moratorium on drilling, but Gulf Coast politicians and residents didn’t like that because it meant even more lost jobs in an area that has already been devastated by the oil spill.

As part of the negotiations with the U.S. government, BP agreed to set up a $20 billion dollar cleanup fund. It also suspended dividend payments to shareholders. But Gulf Coast residents complained that BP’s process for paying damage claims was too long and complicated, and argued that the company was paying out too little.

BP is not the only company facing a crisis because of an oil spill. Near the end of July 2010, Canadian pipeline company Enbridge experienced a pipeline break that eventually released 3.8 million litres of oil into a Michigan river. To date, Enbridge’s response to the spill has been much more positive than BP’s. On the same afternoon that the spill occurred, Enbridge CEO Pat Daniel arrived at the site to spearhead the cleanup effort. He conducted daily news conferences, brought in 560 workers to clean up the oil, and met with many affected residents to ensure them that they would be compensated for damages. The company set up a web site to keep local residents informed about the cleanup activity, and also engaged the services of a public relations firm to provide communications advice. The governor of Michigan praised the company’s cleanup efforts.

Other less well-publicized incidents involving oil have also occurred in 2010. For example, a well failure at Devon Energy Corp. in mid-July 2010 caused bitumen-laced steam to escape into the atmosphere for more than a day. Devon shut down its Jackfish site as a result of the well failure. This incident was just one of several that have occurred in the Alberta oil sands during the past five years. Also in July 2010, a vessel carrying wheat ran aground in the St. Lawrence Seaway. The grounding punctured the vessel’s fuel tank and more than 50 tonnes of bunker fuel spilled into the water, causing the closure of a section of the Seaway.

The State of Deep Water Drilling for Oil

Many oil companies are now drilling for oil in very deep water (up to 4,000 metres), and they are pushing the boundaries of worker and environmental safety. There have been many problems: fires, equipment failures, oil spills, wells that collapsed, drilling platforms that sank, and serious gas leaks. Deepwater drilling is also more expensive than drilling on land; BP, for example, was paying $500,000 per day to lease the Deepwater Horizon from Transocean. Serious accidents are rare, but in 2001 a drilling rig exploded off the coast of Brazil; it also killed 11 workers. In 2003, BP had another accident where a drilling pipe broke. Some BP managers at that time warned that the company wasn’t prepared to deal with a deep-sea oil spill. One U.S. government study found that less than half of the blowout preventers in use by oil companies were strong enough to shear off the drilling pipe if it broke.

Deep water drilling is subject to government regulation, but critics claim that regulatory agencies haven’t held the oil companies accountable. The Minerals Management Service (MMS) is the U.S. government agency that oversees offshore drilling. It has been criticized for moving away from specific safety requirements to more general ones, and for giving the oil industry too much leeway in meeting the standards. And most regulations are designed for shallow-water drilling, not deep water drilling. The BP oil spill is likely to mean much closer regulation of deep water drilling for oil.

The safety record of Transocean (the largest deep-water driller) has come under scrutiny as a result of the oil spill. Overall, Transocean’s record is better than the industry average (0.77 injuries per 200,000 man hours, vs. 0.81 for all offshore rigs worldwide). But nearly 75 percent of incidents that triggered federal investigations into safety and other problems on deepwater drilling rigs have occurred on rigs operated by Transocean. Since its merger with GlobalSantaFe in 2007, Transocean has been involved in 24 of 33 incidents investigated by the MMS, even though the company operates less than half the rigs in the Gulf. Ironically, on the day the well blew out, BP and Transocean officials were on the rig to celebrate 7 years without a lost-time accident.

Chevron is currently drilling for oil in deep water off Newfoundland. Concern has also been expressed about this well, but Chevron says it is developing a new, more effective blowout preventer which will avoid a repeat of the BP spill in the Gulf of Mexico.

Implications for the Canadian Oil Industry

When the drilling rig Ocean Ranger sank in 1984 off the coast of Newfoundland during a major storm, 84 people died. Mark Turner has the job of reviewing oil drilling off Newfoundland’s coast to determine if a blowout like BP’s in the Gulf of Mexico can occur in Canada, but it is difficult to know how much risk should be accepted in offshore drilling. The Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB) has two priorities: to monitor the safety and environmental impact of the offshore oil industry, and to ensure that the maximum benefit will accrue from such drilling. But these two priorities can obviously be in conflict. The C-NLOPB has also been accused of moving too slowly on safety and environmental concerns. In the U.S., the MMS is being split into three separate divisions to avoid future conflicts of interest.

Alberta oil sands companies may benefit from the BP spill because land-based oil wells are seen as safer than deep water wells. MEG Energy Corp., for example, did a $1.25 billion initial public offering (IPO) of stock in the summer of 2010, and Athabasca Oil Sands Corp. had a $1.35 billion IPO in the spring of 2010. Global energy companies are also acquiring Canadian oil sands properties.

Questions for Discussion

  1. What is the difference between contingency planning and crisis management? How are contingency planning and crisis management relevant for the BP oil spill? How well did BP manage the crisis it faced?
  2. Now that some time has passed since the crisis, what has the impact been on BP? What is its current stock price? What does the company’s financial condition look like? What is being written about BP in terms of its reputation and its future?
  3. Was it fair to fire Tony Hayward? Defend your answer.
  4. Consider the following statement: Consumer demand for gasoline and many other oil-based products means that oil companies are motivated to find more oil, even if that means extracting it from ever-more complicated and dangerous places such as deep water locations. Consumers must therefore accept some of the blame for ecological damage, because without consumer demand, there would be no incentive for oil companies to drill in deep water locations. Do you agree or disagree with this statement? Defend your answer.

Sources: Monica Langley, “U.S., BP Near Deal on Fund; Gulf of Mexico Oil Production Would Secure $20 Billion Damage-Claims Plan,” The Wall Street Journal, August 10, 2010, p. A1; Shawn McCarthy, Kevin Van Paassen, and Cigdem Iltan, “Enbridge Shifts PR Campaign into High Gear,” The Globe and Mail, July 31, 2010, p. B3; David Runk and Tim Martin, “Pipeline Oil Spill Firm’s Latest, Winnipeg Free Press, July 30, 2010, p. A17; Lauren Krugel, “Response to Latest U.S. Oil Spill ‘Inadequate’,” Winnipeg Free Press, July 29, 2010, p. A9; Paul Vieira, “Gulf Oil Spill ‘Wake-Up Call’ for Industry: New BP CEO; Safety a Priority,” National Post, July 28, 2010, p. FP1; Guy Chazan, “BP Reveals Comeback Plan; Oil Giant Takes $32 Billion Charge on Spill, Taps New CEO; Investors Skeptical,” Wall Street Journal, July 28, 2010, p. A1; Russell Gold and Ben Casselman, “Alarm Was Disabled Before BP Blast,” The Wall Street Journal, July 24, 2010, p. A1; Shawn McCarthy, “Gulf Residents Decry Drilling Ban,” The Globe and Mail, July 14, 2010, p. B8; “Oil Leak From Grounded Cargo Ship Closes Section of St. Lawrence Seaway,” National Post, July 14, 2010, p. FP4; Nathan VankerKlippe, “Devon Energy Blowout One of Several in Recent Years,” The Globe and Mail, July 14, 2010, p. B7; “BP’s Colossal PR Blunder,” National Post, June 30, 2010, p. FP3; Carrie Tait, “BP Stock at 14-Year Low as Cleanup Costs Soar; Storm Worries,” National Post, June 26, 2010, p. FP5; Shawn McCarthy and Paul Waldie, “In Deep Water Drilling, a Delicate Dance,” The Globe and Mail, June 26, 2010, p. B1; “BP’s Diplomat Unlikely to Repeat Gaffes; Changing of Guard; Bob Dudley Takes Control of Oil-Spill Daily Operation,” National Post, June 23, 2010, p. FP3; David Ebner, “For BP’s Lawyers, a High-Stakes Chess Match Begins,” The Globe and Mail, June17, 2010, p. B1; “Big Oil Blasted Over Safety; Hearing Heaps Scorn on Spending on Preparedness for Offshore Oil Spills,” National Post, June 16, 2010, p. FP1; Peter Shawn Taylor, “BP’s Credit Rating is Slashed Six Levels to Two Above Junk Over Clean-Up Costs,” National Post, June16, 2010, p. FP16; Andrew Willis, “As Slick Spreads, Oil Sands Beckon,” The Globe and Mail, June 16, 2010, p. B1; “BP to Set up $20B Fund; Scraps Dividend,” Business News Network, June 16, 2010, www.bnn.ca/newes/18322.html; Shawn McCarthy and Nathan Vanderklippe, “Spill Puts New Oil Frontiers at Risk,” The Globe and Mail, June11, 2010, p. B1; David Ebner, “BP Spill Causes Transatlantic Tensions,” The Globe and Mail, June 11, 2010, p. B5; Nathan Vanderklippe, “Investors Flee BP as Spill Woes Mount,” The Globe and Mail, June 10, 2010, p. B1; Eric Reguly, “Why BP Chief’s Days are Numbered,” The Globe and Mail, June 3, 2010, p. B2; Ben Casselman and Russell Gold, “Unusual Decisions Set Stage for BP Disaster,”//The Wall Street Journal//, May 27, 2010, p. A1; Fabrice Taylor, “A Bullish Case for BP,” The Globe and Mail, May 21, 2010, p. B12; Ben Casselman and Guy Chazan, “Disaster Plans Lacking at Deep Rigs,” The Wall Street Journal, May 18, 2010, p. A1; Ben Casselman, “Rig Owner Had Rising Tally of Accidents,” The Wall Street Journal, May 10, 2010, p. A1.

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New Prescription Drug Regulations Proposed in Ontario

Government legislation can have a big impact on the operations of business firms. In April 2010, the government of Ontario proposed new regulations for prescription drugs in that province. These proposed changes have caused great debate because it looks like some individuals and companies will benefit from the changes, and others will not. Here’s the story.

Each year, Canada spends about $25 billion on prescription drugs. About half of the prescriptions are filled with name-brand drugs, and about half with generic drugs. Approximately 47 percent of the total cost of prescription drugs is paid by provincial drug programs, 37 percent by private-sector workplace drug plans, and 16 percent by individuals out of pocket.

During the next few years, the patents on several brand-name prescription drugs are going to expire. The drugs whose patents are expiring include Lipitor (cholesterol reduction), Advair (asthma treatment), Nexium (acid reflux), and Crestor (cholesterol reduction). The expiration of patents on these name-brand drugs means that lower-priced generic drugs with the same ingredients will be increasingly available to consumers. This means, for example, that companies covering employee prescription drugs through their health plans should see substantial savings as a result of these patent expirations. In the short run, they could save somewhere between $25 and $45 per employee, and as more patents expire on brand-name drugs in the future, companies might save up to $100 per employee. In percentage terms, this means an 8 percent reduction in costs immediately and a 16 percent reduction over the next few years. The changes are particularly helpful to companies in the automobile industry, since their health care costs are so high. The Canadian Vehicle Manufacturers Association has indicated its approval of the changes, saying that they will make automobile manufacturers more competitive.

The expiration of patents on name-brand drugs also presents an opportunity for provincial governments to cut their prescription drug costs; they are highly motivated to do this because of rapidly increasing provincial budget deficits. The Ontario provincial government has proposed two key changes to its prescription drug regulations that are designed to save the province $500 million. First, the province will now reimburse pharmacies for generic drugs at only 25 percent of the price of the name-brand equivalent (the government formerly paid 50 percent). This change will reduce by half the costs incurred for generic drugs by government, and reduce by more than half the cost incurred for individuals who pay for their drugs out of pocket or through insurance plans (currently, generic drugs cost about 70 percent as much as name-brand drugs). This change is being proposed because generic drugs in Canada cost significantly more than generic drugs in the U.S. and the U.K.

Second, the new regulations ban professional allowances that generic drug manufacturers pay pharmacies to carry their drugs (in 2009 generic drug manufacturers paid Ontario pharmacies a total of $750 million dollars in professional allowances). The ban is being proposed because the Competition Bureau is concerned that consumers are not benefiting enough from the competition that currently exists among generic drug makers. In a speech on April 8, 2010, Ontario Health Minister Deb Matthews noted that pharmacies are supposed to use professional allowances to improve patient care, but instead they have been using the money for salaries, bonuses, and fringe benefits. She also said that many individual pharmacies have failed to file required reports indicating how they are using professional allowance money they have received from generic drug makers. Matthews says she is committed to reducing the price of generic drugs, and to reforming a system that has been open to abuse. Other critics argue that professional allowances are really nothing more than kickbacks which don’t help consumers (because the cost of the allowances is simply added to the price of generic drugs). Barbara Martinez, an analyst with Mercer Canada Ltd., was formerly a sales representative with a generic drug company. She says that the paying of professional allowances has caused the price of generic drugs to increase because pharmacies were always putting pressure on generic drug companies to pay more professional allowances than their competitor was paying. This increased the cost structure of the generic drug manufacturers and caused generic drug prices to increase.

To soften the impact of these two changes, the government proposes to increase the dispensing fees that the government pays to pharmacies, and to increase financial support for pharmacies in rural areas. As well, the proposed changes will initially apply only to drugs that are made available through the Ontario Drug Benefit Plan, which provides drugs to elderly and disabled people. The changes would be phased in over time for drugs that are sold to people covered by private insurance programs and for people who have no coverage.

These changes should reduce health care costs for consumers, for the government, and for companies that fund employee drug costs. So, everyone should be happy, right? Wrong. Drug chains (like Shoppers Drug Mart and Rexall) and grocery chains (like Loblaw and Sobeys) that have pharmacies in their stores are unhappy because the changes will substantially reduce their revenues. After the plan was announced, the shares of Shoppers Drug Mart dropped 15 percent in value. Financial analyst Keith Howell of Desjardins Securities said that the changes are detrimental to Shoppers Drug Mart, and he downgraded his recommendation on the stock from “hold” to “sell.” Smaller drug stores may suffer even more than the big drug chains because they rely more on prescription drug sales for their profits. Overall, it is estimated that the industry will lose about $1 billion in revenue. Mark Dickson, the chairman of the Canadian Association of Chain Drug Stores, characterized the changes as a huge cut in funding for pharmacies. He said that many small pharmacies cannot possibly cope with these changes.

Rexall responded to the changes saying that they would have to start charging for delivering prescriptions, and that they would freeze hiring at their corporate headquarters. The company also said that it would eliminate pharmacy student and intern programs in Ontario, and assess it future investment plans in the province.

Shoppers Drug Mart had already recognized the possibility that the Ontario government might introduce changes to the provincial drug program. In one of its recent financial statements, for example, it noted that it faced two risks: changes to the pharmacy reimbursement program, and the availability of manufacturer allowances. Both of these risks have now materialized with the government’s changes. The company said it was looking at closing some stores, laying off some staff, reducing hours of store operation, and reassessing their operations in Ontario.

The changes introduced by Ontario will be closely examined by other provinces, and they may follow suit because they, too, are facing increasing health care costs and large provincial budget deficits. The drug chain stores and grocery stores with pharmacies are concerned that if this becomes a national trend, their profitability prospects will be negatively affected.

Questions for Discussion

  1. What are the various roles that governments play in Canada’s mixed economic system? What is the primary role the Ontario provincial government is playing in the situation described above? Give examples that illustrate your conclusion.
  2. When new government regulations are implemented, some individuals and groups benefit and others do not. Identify those who will benefit and those who won’t as a result of the proposed new prescription drug rules in Ontario.
  3. Consider the following statement: The changes proposed by the government of Ontario will not have the intended effect. They will simply motivate pharmacies to protect their financial bottom line by doing things like discontinuing some services, or starting to charge for services that are now free. So, the overall benefit will be minimal. Do you agree or disagree with the statement? Explain your reasoning.

Sources: www.health.gov.on.ca/en/public/programs/drugreforms/speeches/speech_201004088.aspx, accessed April 27, 2010; Tom Blackwell, “Pharmacy Fight; Ontario’s Drug Reforms Being Closely Watched Across Country,” National Post, April 17, 2010, p. A4; Tom Blackwell, “Going Behind the Counter,” National Post, April 17, 2010, p. A4; Brent Skinner and Mark Rovere, “Fix the System, Not Prices; Ontario has Slashed and Fixed Prices for Generic Drugs. A Better Idea is to Overhaul the System and Let Consumers Rule,” National Post, April 17, 2010, p. FP19; Fabrice Taylor, “Shoppers Picks A Fight That It Will Not Win,” The Globe and Mail, April 15, 2010, p. B12; Andre Picard, “Cheap Drugs? There’s a Cost,” The Globe and Mail, April 15, 2010, p. L1; “Rexall Replies to Ontario With Cuts Of Its Own; Will Freeze Hiring, Charge To Deliver Prescriptions,” National Post, April 14, 2010, p. FP14; Grant Robertson, “Ontario Offers Glimpse Of Future Drug Savings,” The Globe and Mail, April 13, 2010, p. B5; Marina Strauss and Karen Howlett, “Shoppers Faces Pitfalls And Opportunities In Wake Of Ontario Drug Rule Changes,” The Globe and Mail, April 10, 2010, p. B3; Clare Dear, “Shoppers Shares Tumble; Ontario Rules To Cost Pharmacists $1 Billion,” National Post, April 9, 2010, p. FP1; “Professional Allowances and the Price of Generic Drugs,” CBC News-Health, April 9, 2010, www.cbc.ca/health/story/2010/04/09/f-generic-drugs-professional-allowances; Adam Radwanski, “Ontario to Prescribe a Bitter Pill for Pharmacies,” The Globe and Mail, April 8, 2010, p. A9.

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What About Wind Power?

In recent years, a great deal of concern has been evident about the amount of carbon dioxide (CO2) that is being released into the environment as a result of burning fossil fuels like coal and oil. This concern has led to a search for alternative sources of power that do not cause so much pollution. Wind power is one of those promising alternative sources of power. The idea seems simple: capture the tremendous energy of the wind and convert it to electricity using wind turbines. Older Canadians can remember a time when windmills on individual farms were used to generate electricity. Why don’t we just implement that idea on a major scale to help solve our environmental problems? Unfortunately, it’s not as simple as it looks. We’ll get to the complications in a minute, but first some statistics about wind power.

In 2009, the U.S. generated 35,000 megawatts (MWs) of wind power, Germany 26,000, China 25,000, and Canada 3,300. These may seem like large numbers, but wind power currently provides only 1 percent of electricity requirements in Canada, 1.3 percent in the U.S., and 9 percent in Europe. In 2009, more than 37,000 MWs of new wind power were built worldwide (13,000 in China alone). Canada added 950 megawatts, and ranked 9th in the world.

In January 2010, the province of Ontario announced that it had signed a $7 billion agreement with Samsung and Korea Electric Power Corp. to build four manufacturing plants which would produce wind turbine towers and blades, solar inverters, and modules. Samsung also plans to produce 2,500 MWs of wind power. The deal included $437 million of incentives to attract the companies to Ontario. Managers at Canadian companies in the wind power business expressed surprise at the announcement because the incentives given to Samsung were not made available to Canadian companies.

There is currently a great deal of interest and activity in the wind power business, and the future looks promising. But with any new idea there are always unexpected problems that arise, and situation with wind power is no different.

Problem #1. Government subsidies which encourage investment in wind farms are having the effect of raising the cost of electricity. But without government subsidies there might be very little interest in the development of wind power. In Ontario, the Green Energy Act pays wind farms 13.5 cents for each kilowatt hour (kWh) of electricity they generate. The Ontario subsidy has already attracted attention from a large U.S. company. NextEra, the renewable energy division of Florida Power and Light (FPL), has more than 60 wind farms in the U.S. which are capable of producing 7,500 megawatts MWs of power. That’s more than all the Canadian wind farms combined. NextEra has already bought up Canadian wind farms in Nova Scotia and Quebec, and it is planning to develop new wind farms in Quebec, Ontario, and Alberta.

Critics question why Ontario is paying 13.5 cents per kWh when electricity can be purchased on the open market for less than 6 cents per kWh. A study by the London Economics Consultancy concluded that residential electricity bills will increase by hundreds of dollars each year as a result of the higher rates the province is paying for wind power. Industrial users of electricity will also incur higher operating costs and may therefore be less competitive than companies in other provinces or foreign countries. Opponents of wind power argue that it is a better strategy for Canada to build more hydroelectric generating stations, since there are enough new hydro sites in Quebec, Labrador, and Manitoba to meet Canada’s electricity needs for decades to come.

Problem #2. There is a growing debate about the impact that wind farms have on the health of people living near them. NextEra has conducted public meetings for people who live near its proposed sites, and some of those meetings have been quite confrontational. A spokesperson for a group called Wind Concerns Ontario says that NextEra gave unsatisfactory responses when concerns were expressed about the negative health effects of wind farms. One study of 36 people living in several different countries who said they were affected by the noise of wind turbines found that their symptoms disappeared when they moved at least five miles away from any wind turbines. But another study by the American and Canadian Wind Energy Associations found no evidence that wind turbine sounds have any negative physiological effect on people. The report noted that turbine sounds are not any different than the variety of other sounds that people are exposed to. But lawsuits on noise pollution allegedly caused by wind farms are pending in several U.S. states and in New Zealand. The European Platform Against Windfarms has 388 groups in 20 countries that oppose wind power. Canada has more than two dozen groups, and the U.S. has over 100. The effect that all this activity will have on the future development of wind power remains to be seen.

Problem #3. There is concern about the visual pollution associated with wind turbines. In Nantucket Sound off Cape Cod, a dispute has developed over a proposal to put 130 turbines offshore (the turbines would be 134 feet high). Residents object, saying it will destroy the view. Some companies say this problem can be solved by building wind turbines far out in the Great Lakes. Trillium Power Wind Corp. plans to build a wind farm in Lake Ontario that will be 17 kilometres from shore. But environmentalists don’t like the idea very much.

Problem #4. Studies in Europe show that very few new jobs are actually created by wind power, and those that are created are very costly (between $90,000 and $140,000 each). One Canadian study showed that the new jobs that will be created by the Ontario-Samsung deal will cost $300,000 each because of the subsidies that are being paid to Samsung. The claim has been made that the Samsung deal will create 16,000 jobs (out of the total of 50,000 jobs the Green Energy Act is supposed to create), but a study in Spain showed that for every green job created by government, two jobs are lost elsewhere in the economy.

Problem #5. Engineers point out that the energy density of flowing air is very low, and this means that in order to generate significant amount of electricity from wind turbines, thousands of them are needed to match the power output of just one coal-fired power plant. Also, turbines operate within a fairly narrow range of wind speed. If a wind farm is designed for a wind speed of, say, 55 kilometres per hour (kph), it will generate no electricity if the wind speed is less than 35 kph. But if the wind speed is more than 70 kph, the turbines will burn out unless they are slowed. The famous Dutch windmills of the past had to be watched 24/7 so that if trouble developed it could be immediately dealt with. There are also reliability problems. On many of the wind farms in Europe, about 20 percent of the turbines are out of service at any one time. Wind power may look simple, but it isn’t.

Problem #6. Unexpected conflicts have developed between wind power and other sources of clean energy. Consider wind power and natural gas. Environmentalists often talk about how wind power and natural gas can work together to reduce CO2 emissions, but in Texas supporters of wind power have come into conflict with supporters of natural gas. Why? Because in Texas, when a nuclear, natural gas, or coal-fired electric utility fails to deliver the power it promised, it has to pay for back-up power generation. But if a wind power plant doesn’t deliver the power it promised, the cost of back-up generation is borne by the other electricity providers. Wind power is also given first priority. That means on windy days, all the power that wind farms can provide is used and there is less need for electricity generated by natural gas. During the past three years, these rules have meant that wind power’s share of total electricity output has increased from 2 percent to 6 percent, while natural gas’s share has dropped from 46 percent to 42 percent. Why would Texas have such rules favouring wind power? Because there is no way to guarantee that the wind will blow, so wind power is taken when it is available.

Problem #7. One of the main reasons for shifting to wind power is to reduce CO2 emissions. While this remains a desirable goal, there are major problems getting an international agreement on carbon reduction. With the failure of the Copenhagen meetings in 2009, and the reduced likelihood that a cap-and-trade carbon system will be imposed in North America, one of the main reasons for shifting to wind power has become far less important. As well, the reduction of CO2 emissions that can be achieved by switching from fossil fuels to wind power is not large. Since wind power is not as reliable as power generated by nuclear, natural gas, or coal, back-up generating stations are needed, and these are usually fossil fuel plants.

Questions for Discussion

  1. Which of the problems listed above do you think are the most significant? Which are the least significant? Explain your reasoning.
  2. How do the advantages and disadvantages of wind power compare to the advantages and disadvantages of other relatively clean sources of power (nuclear, solar, hydroelectric, and tidal power)?
  3. Consider the following statement: Canada should stop spending money trying to develop wind power and should instead emphasize the development of its hydroelectric resources because those resources are abundant and non-polluting. Do you agree or disagree with the statement? Explain your reasoning.

Sources: “Hydroelectric Power Water Use,” www.ga.water.usgs.gov/edu/wuhy.html, accessed March 13, 2010; Richard Blackwell, “A Quiet Giant Moves In,” The Globe and Mail, March 8, 2010, p. B3; Michael Trebilcock, “Blowing Away Taxpayers; Wind Power is Unreliable, Expensive, and Doesn’t Result in Lower CO2 Emissions. Why Is Ontario Still Rushing Ahead With It?” National Post, March 6, 2010, p. FP19; Henk Tennekes, “Wind Power The Worst Kind of Mirage,” National Post, March 3, 2010, p. FP15; Russell Gold, “Natural Gas Tilts at Windmills in Power Feud,” The Wall Street Journal, March 2, 2010, pp. A1, A20; Robert Bryce, “The Brewing Tempest Over Wind Power,” The Wall Street Journal, March 2, 2010, p. A23; Richard Blackwell, “Canada Breezes into World’s Top 120 for New Turbines,” The Globe and Mail, February 4, 2010, p. B2; Richard Blackwell, “Unfair Advantages Cited in Samsung Deal,” The Globe and Mail, January 25, 2010, p. B5; Lawrence Solomon, “Winds of Change: Premier McGuinty has Committed Ontario to a Generous Deal for a Soon-To-Be-Forgotten Energy Source,” National Post, January 23, 2010, p. FP19; Karen Howlett, “Ontario’s Green Deal Raises Ire of Energy Developers,” The Globe and Mail, January 22, 2010, p. A5; Richard Blackwell, “Ontario’s Wind Power Snags Lamented,” The Globe and Mail, January 19, 2010, p. B3; Mary Vallis, “Nantucket Wind Farm Fight Nears Resolution; Kennedys Opposed,” National Post, January 12, 2020, p. A3; “Turbines Noisy, But Not Harmful: Panel,” National Post, December 16, 2009, p. A4.

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The Toyota Recall

Most introductory textbooks in introduction to business, management, and organizational behaviour describe the philosophy of continuous improvement and emphasize the importance of quality management. Continuous improvement means that everyone in an organization is thinking about ways to improve operations, even if the company is already doing well. Quality management means producing products that are fit for consumer use and reliably do what they are supposed to do. If these two ideas are implemented, so the argument goes, the result will be the production of reliable, high-quality goods for consumers.

During the last decade, many companies have adopted the continuous improvement philosophy. One of the most highly publicized companies is Toyota, which recently overtook General Motors as the largest car manufacturer in the world. Toyota has received a lot of positive publicity about “The Toyota Way,” which emphasizes efficient production methods, continuous improvement, and the production of high quality products. Toyota’s production system is so impressive that executives from other automobile companies regularly tour Toyota’s manufacturing plants in an attempt to discover Toyota’s secret.

But some big problems have arisen for Toyota during the last few months. The trouble started in November 2009, when Toyota announced that it was recalling more than five million cars because some accelerator pedals were getting jammed in the driver’s side car mat and causing cars to surge forward uncontrollably. That was bad enough, but on January 21, 2010 Toyota announced another recall, this one involving 2.3 million vehicles (270,000 in Canada). This second recall was also precipitated by problems with accelerator pedals, not because they were getting jammed in floor mats, but because there was something wrong with the pedal itself. Toyota was forced to take the dramatic step of halting production and sales on eight of its most popular vehicles: Corolla, RAV4, Camry, Avalon, Matrix, Highlander, Tundra, and Sequoia. These models account for 60 percent of Toyota sales in Canada.

On February 4, 2010 Toyota was hit with a third public relations problem when safety regulators in the U.S. opened a formal investigation into consumer complaints about braking problems on the Toyota Prius, the top-selling hybrid automobile. The National Highway Traffic Safety Administration (NHTSA) said it had received over 100 complaints about braking problems after the Prius hit bumps or potholes. It was alleged that four crashes had resulted from the braking problem, but it was not immediately known whether this latest problem would result in yet another recall. A government committee has asked Toyota to provide data on the complaints the company received regarding braking problems.

These three problems have created anger and concern among Toyota owners, who are suddenly scared to drive their cars. Toyota worked frantically with its supplier, CTS Corp., to figure out a way to solve the accelerator pedal problem. On February 1, 2010 Toyota announced that the problem would be fixed by inserting a steel reinforcement bar into the accelerator pedal assembly to reduce the tension that was causing the pedal to stick. CTS began producing the redesigned pedal a few days later. Toyota admitted that the accelerator had a design flaw and that CTS was not at fault (CTS also produces accelerator pedals for Honda and Nissan and no problems have been found in those cars).

CTS began shipping the new accelerator pedals to automobile dealers, along with parts and technical manuals to guide the work of technicians. Dealerships also geared up for the massive job of fixing millions of accelerator pedals. Many dealers said they would extend their hours in order to accommodate customers. Toyota also gave instructions to consumers about what to do if their car suddenly accelerated: step on the brake with both feet, shift the car into neutral, then steer the car to the side of the road and turn off the ignition.

In an effort to reassure the public, senior executives from the company went on TV to tell customers that they were going to quickly fix the problem and get the redesigned accelerator pedals on the recalled cars. A letter signed by Jim Lentz, the CEO of Toyota’s U.S. operations, also appeared as a full-page advertisement in newspapers. In the letter, Lentz apologized for the error and explained how hard Toyota was working to get its automobiles refitted with new accelerator pedals. Lentz also appeared on NBC’s “Today” show to explain how the company was going to fix the problem. The president of Toyota admitted that the company was in crisis, and also made a very public apology for the quality problems that were causing consumers so much concern. The value of Toyota’s stock declined about 20 percent in the immediate aftermath of the recall announcement.

These quality problems have created a public relations nightmare for Toyota because the company has always emphasized its reputation for producing reliable, high-quality automobiles. Many consumers in Canada and the U.S. do, in fact, have the perception that Toyota produces higher quality cars than those produced by Ford, Chrysler, and GM. But these three incidents may change those perceptions. A survey conducted by HCD Research found that 56 percent of respondents said they were less likely to buy a Toyota after watching Jim Lentz on the “Today” show. Toyota’s competitors now sense an opportunity to gain back customers. For example, Ford and GM have introduced a $1,000 rebate program for Toyota car owners who want to trade in their Toyota and buy a Ford or GM product.

Toyota is probably going to have to spend considerable time and money trying to deal with the fallout from these problems. A Canadian class-action lawsuit against Toyota and CTS Corp. claims that Toyota knew (or should have known) that there were design defects in the electronic throttle control system. A typical case is that of John James, who was driving on the Trans-Canada highway in B.C. when his 2009 Toyota Corolla suddenly surged out of control. Shortly thereafter he rammed into the back of a pickup truck at 125 kilometres an hour. Surprisingly, no one in his car was injured. James is now part of the class action lawsuit against Toyota. One Toyota owner in Toronto is suing, not because his vehicle was involved in a crash, but because he feels that his Toyota RAV4, which cost him $40,000 is now worthless because of all the publicity about Toyota’s quality problems.

Toyota also faces several class-action lawsuits in the U.S. because of 19 deaths allegedly caused by jammed accelerators that caused cars to crash. In the U.S. lawsuit, the plaintiffs are claiming that Toyota knew about the accelerator defect, but didn’t do anything about it.

Questions for Discussion

  1. How could quality problems like these occur at a company that had such a good reputation for producing high-quality automobiles?
  2. Do you think that this problem will have lasting negative effects on sales of Toyota vehicles? Explain your reasoning.

Sources: Gordon Pitts, “Too Big, Too Fast, and an Apology Too Late,” The Globe and Mail, February 6, 2010, p. B1; “Toyota CEO Apologizes for Recall,” Business News Network, www.bnn.ca/news/15560.html, accessed February 5, 2010; Jeff Gray, “Canadian Toyota Owners Seek Their Day in Court,” The Globe and Mail, February 3, 2010, p. B8; “U.S. Probes Toyota Prius Brake Problem,” Business News Network, www.bnn.ca/news/15531.html, accessed February 3, 2010; Ken Bensinger and Robert Channick, “Toyota Reveals Plans to Fix Pedal Problem,” The Orlando Sentinel, February 2, 2010, p. B6; Greg Keenan and Jeff Gray, “Toyota Faces Class-Action Suits,” Business News Network, www.bnn.ca/news/15452.html, accessed February 1, 2010; Greg Keenan, “Toyota Executives Plan Media Blitz,” The Globe and Mail, February 1, 2010, p. B1; Greg Keenan, “Toyota Scrambles for Remedy as Recall Grows,” The Globe and Mail, January 30, 2010, p. B3; Paul Vieira, “Toyota Finds a Fix; Pedal Maker Speeds Up Output as Recall Grows,” National Post, January 29, 2010, p. FP1; Greg Keenan, “As Toyota Stumbles, Rivals Eye Gains,” The Globe and Mail, January 29, 2010, p. B1; John Greenwood, “Toyota Faces Massive Recall,” National Post, January 28, 2010, p. FP1; Greg Keenan, “Toyota Suspending Sales of Models Involved in Recall,” The Globe and Mail, January 27, 2010, p. B12.

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