Education

Key ethical issues in B2B pricing

D. Murali | Updated on June 16, 2011 Published on June 16, 2011

BL16BOOKS

BL16DEFINING



Ethical issues often arise in pricing, observe Ms Ross Brennan, Mr Louise Canning, and Mr Raymond McDowell in ‘ Business-to-Business Marketing,' second edition ( www.sagepublications.com). If you wonder about the ‘often' part of the statement, a study cited in the book informs that nearly 40 per cent of respondents (in a survey that interviewed the managing directors of 348 Irish businesses to investigate their perceptions of the importance and frequency of various unethical practices) perceived ‘unfair price' to be occurring ‘very commonly' – so much so, it was the second most common out of a list of ten unethical practices.

Price fixing

The authors note that the principal ethical issues that arise in B2B pricing decisions are anti-competitive pricing, price fixing, price discrimination, and predatory pricing or dumping. For starters, anti-competitive pricing arises where a group of producers collude to raise prices above the level that would apply in a freely operating market.

Thankfully, however, anti-trust laws prohibit such behaviour. Examples of laws mentioned in the book are the Sherman Act (US), Article 81 of the EC Treaty (EU), and the Act Concerning Prohibition of Private Monopoly and Maintenance of Free Trade (Japan).

Of interest in the book is the tale of price fixing in the American explosives market during the 1980s and 1990s. As the authors narrate, the allegation was that explosives manufacturers had artificially raised and fixed prices, allocated customers among themselves, and rigged commercial bids between 1988 and 1992. Following legal action by the US Department of Justice under the Sherman Act, several companies were found guilty on price-fixing charges and were fined. “In 1995, ICI Explosives USA Inc. received a $10 million criminal fine for conspiring to fix the prices of commercial explosives sold in western Kentucky, southern Indiana and southern Illinois. Dyno Nobel, the world's second largest commercial explosives manufacturer, was fined $15 million for similar offences.”

Collusive tendering

Another instance of unethical pricing elaborately discussed in the book is collusive tendering, which occurs where there is ‘an exclusive agreement between competitors either not to tender, or to tender in such a manner as not to be competitive with one of the other tenderers.' You may only have to look around to find the malaise in the construction and defence sectors, as also in a wide-range of government procurement arrangements.

For instance, at the time of writing, Pakistan Observer reports that the Competition Commission of Pakistan (CCP) has imposed a sum of Rs 100 crore as penalty on five undertakings for engaging in collusive bidding in a tender of Peshawar Electric Supply Company (PESCO). And http://finchannel.com has a story about the World Bank's call for stronger action by countries to fight corruption; the Bank has suggested that, in addition to more widely adopting project-level preventive measures, more attention should be paid to project supervision, especially in high-risk environments and with a particular focus on verification of cost estimates and the identification of collusive bidding.

The essence of collusion in tendering, as the book explains, is that there is an agreement between the bidders to win the contract for one bidder, with the other parties receiving some other benefits, in the form of financial benefits or agreements that they will win future contracts. “Collusion aims to undermine the rationale for competitive tendering by avoiding direct price competition between the bidders. In commercial contracts this means that the buyer is disadvantaged by paying more than they otherwise would, while in government contracts the ultimate loser is the taxpayer.”

Educative material for those in the high-value procurement space.

Seven behaviours CEOs must avoid

Greed tops the list of seven ‘behaviours to avoid' in ‘ Defining Moments: What every leader should know about balancing life' by Kees van der Graaf ( www.imd.org). “Some business leaders have certain characteristics that really irritate and upset me,” begins Kees.

“These are probably the root cause of the problems we are now facing in the economy, and they are also why some large multinationals have difficulty dealing with their negative perceptions and images.”

In the author's view, greed is at the heart of most issues. You can see greed in action when leaders always want more and more money for themselves.

Pointing out that salaries are becoming far too high, and bonuses particularly in financial services are outrageous, Kees cautions that such a bonus culture leads to the wrong decisions and the wrong behaviours.

On a related note, the second behaviour to avoid is selfishness. Celebrity CEOs who appear in the press too often and put their own interests ahead of the interests of the firm often develop superiority complexes, instructs Kees. “With their know-it-all attitudes, they tend not to listen to others, which results in them becoming more and more isolated.”

The natural consequence of isolation is to operate from an ivory tower, the third irritating characteristic of CEOs. Compounding this problem can be the fourth in the list, ‘listening to the wrong people.' Some CEOs are surrounded by a large number of staff who ‘protect' them from being influenced by the front-liners in the organisation, observes Kees. Blaming the predecessor all the time, for the current state of affairs, is the fifth undesirable behaviour, one learns. How does blaming help anyway? This makes it possible for the CEO to clear the decks at huge cost and then get full credit for the restructuring, explains Kees.

A lesser sin perhaps, though with an immense damage potential, is the sixth, the ‘short-term outlook,' pressured by which CEOs work at delivering on quarterly expectations for the financial analysts, rather than driving sustainable results. Last in the list of avoidable behaviours is the putting of shareholder value maximisation ahead of stakeholder value creation.

The time has come, he notes, for leaders to realise that you do not simply take without giving anything back. Urging leaders to act more responsibly in the areas of sustainability and social responsibility, Kees makes a fervent plea, thus: “The world in which we live, the planet that we occupy, will be ruined if we do not change this attitude and, instead, focus on total value creation, which satisfies the needs of a multi-stakeholder configuration.”

A book replete with messages of profound import.

>BookPeek.blogspot.com

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Published on June 16, 2011
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