Will You Be a HIP Conglomerate?

Wall Street analysts and institutional investors examine sales growth, international sales, product mix and business unit ups and downs. All of these are financial in nature, and critically important to an enterprise’s economic prosperity.

But those metrics can also be lagging or incomplete. Customers buy products for a reason. HIP Investor’s research and analysis shows that the most successful companies typically hone in on solving a human problem – health and wellness, financial security, eco-efficient equipment, equal access and increased trust and credibility.

Products that are “HIP” generate both Human Impact + Profit ™, because they are designed that way from the start, screened along those criteria during research, development and launch, and deliver a core environmental, social or human benefit to customers, while making money for shareholders. Yes, they Do Good AND Make Money.

At PepsiCo, CEO Indra Nooyi (BIO) is integrating a business strategy of “Profit With Purpose,” which includes initiatives in health and nutrition, environment and people. PepsiCo is now tracking its product revenue in the categories of “good for you” (like Tropicana, Quaker Oats, SunChips, Naked Juice, SoBe and Ethos Water) and “fun for you” (like Doritos and Mountain Dew). At last count, Pepsi’s “good for you” products represented 30% of its revenue, which it expects to increase over time (though the Q1 2009 earnings presentation highlighted a “maniacal” focus on cash). Pepsi is a top performer in HIP ratings – and Q1 2009 return on equity is over 40% – which has enabled it to outperform the S&P and Dow indices.

At General Electric, the “ecoMagination” strategy has evolved from CEO Jeff Immelt’s self-admitted “good public relations” to real revenue and profit. GE’s wind turbines, fuel-efficient railroad engines and compact fluorescent light bulbs are examples of 70 products in ecoMagination, contributing top-line 2008 revenue of $17 billion, or nearly 10% of sales worldwide. GE expects that to grow to $25 billion by 2010, building off its $1.5 billion ecoMagination R&D budget. GE has also announced they are an anchor R&D partner for Masdar City (the world’s first zero-waste, carbon-neutral, renewable-energy city, based in Abu Dhabi). GE’s leadership in these segments are generating revenue and profit growth as well as energy efficiency and emissions reductions, but the company has been hampered by its un-HIP exposure in financial services and leverage. GE’s management practices (lower carbon is on each executive’s performance goals and reviews) are very HIP and recent ROE is above 10%, but shareholder performance has not lived up to historical norms.

What is YOUR HIP revenue share? Most companies still don’t know exactly. While HIP’s approach examines environmental, social and human impact created for customers by the products and services of the company – and how they generate profit, our interviews with companies have found that there is not yet tracking of this metric systematically like Pepsi and GE.

HIP’s five categories of impact (health, wealth, earth, equality, trust) are based on solving human problems that are highlighted by Maslow’s hierarchy of needs. Many times the industry dictates a company’s category of primary impact, for example:

= Health: Obviously, the mission of health care is healing patients and encouraging wellness. Data mining technologies help Cardinal Health’s MedMined help track outcomes, and support pharmacies in managing complexity. An example of a Health+Earth product is Hospira Inc.’s VisIV, a new IV solution container resulting in 40%-70% less waste than similar products.

= Wealth: In these times, it’s hard to identify firms that are solving financial challenges in banking or investing. Before the meltdown, Wachovia Bank shared how its CRA (community reinvestment act programs) were becoming a business strategy, to help the poor become richer. (Unfortunately, Wachovia’s toxic assets led to its acquisition by Wells Fargo.) In social investing, State Street and Northern Trust offer mutual funds and exchange-traded funds (ETFs) that enable investors to invest in HIP firms, supporting human impact and profit.

= Earth: Innovative materials companies are pioneering environmental breakthroughs: PerkinElmer’s suite of sensor products (in industrial, auto and safety) annually reduce 22 million tons of carbon emissions. Allegheny’s grain-oriented electrical steel (GOES) is used in lightweight and eco-efficient equipment, saving energy and emissions. Ball’s award-winning 100% recyclable, lower-weight-than-glass wine bottle that uses both product and process innovations to drop the overall footprint and cost over its lifecycle. Juniper’s new routers save 30% energy and half the data-center space, and Tellabs 5500 digital cross-connects drop energy usage 85%.

= Equality: Whether gender, ethnic, income-level, or species, HIP products seek to equally serve the full range of society. BB&T Financial is increasing its support of community-development corporations to better serve the full diversity of customers. Cosmetics firm Estee Lauder is seeking the elimination of animal testing in its product development.

= Trust: Technology helps provide new lenses into great deals for customers. eBay provides competitive and transparent pricing (though buyers need to validate quality), Progressive Insurance compares prices to its competitors for consumers, and Amazon enables a competitive marketplace against its own retail products.

This strategic view about solving human problems focuses innovation and R and D on the most pressing opportunities – which also creates loyal customers, engaged employees, and committed suppliers. These products also tend to be first to market, higher margin, market-share grabbers and have the potential for long-term profitable lines of business.

Can you be a HIP Conglomerate? One example of a multi-impact company is McGraw-Hill. While many recognize its affiliation with textbooks, McGraw Hill (a multi-generational family controlled company) owns several lines of business across all five HIP human impacts.

= Health: Harrison’s Practice is a mobile resource that provides doctors and nurses with the latest medical advances and knowledge via the web and hand held devices, which can be used with patients more easily than books.

= Wealth: Standard and Poor’s, author of the S&P500 and other indices, tracks daily changes in stock prices around the world, and provides timely information about the state of portfolios – and makes it easy to diversify as well as be used as a platform for firms that manage customer wealth.

= Earth: Platts’ energy commodities price assessments are now incorporating info about emerging emissions, biofuels and liquid natural gas markets; and McGraw Hill’s construction industry media, product information, market trends and forecasts are incorporating details on green and sustainable building projects.

= Equality: iSpeak is a device that turns an MP3 player into a portable translation device, while Acuity is an accountability testing program for public schools.

= Trust: Customer satisfaction surveyor (and consultant) J.D. Power and Associates’ creates a deeper understanding of what customers want – and showcases it with awards that increase transparency about who’s a top performer. Increases in customer satisfaction scores also correlate with higher revenue growth, profit growth and shareholder value.

How much of YOUR revenue is HIP? How is your company solving human problems for profit? What is your strategy for creating Human Impact + Profit?

= Share your successes with us at HIPrevenue@HIPinvestor.com – or contact us to advise you on how to create more HIP products and generate more HIP revenue. =

Finally, THANKS! To all the HIP portfolio research associates who have contributed to the 500+ companies that HIP Investor has researched across Products, Human Impact (health, wealth, earth, equality, trust), Management Practices — and how they drive Profit.