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CEMP: Corporate Environmental Program The University of Michigan Sustainable Enterprise Program A program of the World Resources Institute DEJA SHOE (A): Creating the Environmental Footwear Company Recognizing the changing role of the corporation in society, the University of Michigan’s Business School and the School of Natural Resources created the Corporate Environmental Management Program (CEMP). The program is designed to develop leaders, executives, and managers – whether they work in the
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    This case was prepared by  Paul W. Hardy under the supervision of   Stuart Hart   , Director of the University of  Michigan’s Corporate Environmental Management Program (CEMP)  , as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. We gratefully acknowledgethe support of  Consumers Power  in developing teaching materials in corporate environmental management.Copyright © 1996 by CEMP.World Resources Institute has collaborated with CEMP to help disseminate this case to a wider audience. For more than a decade, WRI's Sustainable Enterprise Program (SEP) has harnessed the power of business to create profitable solutions to environment and development challenges. BELL, a project of SEP, helps universities, graduate schools and corporations integrate environmental issues into their educational programs, and providesnew thinking about the relationship between business and the environment. CEMP: Corporate Environmental Program   The University of Michigan    Sustain   A program of the World Resources Institute able Enterprise Program Recognizing the changing role of the corporation in society, theUniversity of Michigan’s BusinessSchool and the School of NaturalResources created the CorporateEnvironmental ManagementProgram (CEMP). The program isdesigned to develop leaders,executives, and managers – whether they work in the privatesector, public sector, or for anenvironmental non-profit – with theskills and knowledge required tocreate economically andenvironmentally sustainableorganizations Permission to reprintthis case is available at the BELLcase store. Additional informationon the Case Series, BELL, andWRI is available at:www.BELLinnovation.org. DEJA SHOE (A): Creating the Environmental Footwear Company   Julie Lewis’ interest in recycling began in the early 1960’swhen recycling wasn’t fashionable. Recycling in her homewas done out of necessity. She helped her mother crushaluminum cans and return them to the local recyclingcenter. She became concerned with environmental issuesas a high school student when national attention wasfocused on the first Earth Day and water restrictions madenews in her native California. With the encouragement of her teacher, Lewis made a video on the “State of theEnvironment” for a class project. Combining her environmental awareness with her instilled habit of recycling, she endeavored to launch a program wherebystudents would sift through landfills to extract recyclables.However her effort was discouraged by landfill ownersconcerned about potential liabilities.  When she became active in environmental issues again years later, Lewis took note of existingrecycling programs. Although her Oregon community had one of the most ambitious curbsidecollection programs in the state, little of the material collected was actually recycled. Mostconsumer products still used virgin materials in production processes, as potential uses for recyclables were largely misunderstood or unexplored. The faults in the recycling programsspurred her to act:The problem with the mandatory programs was that they didn’t have any marketsfor the stuff, so a lot of it was put in warehouses and ended up in landfillsanyway. Nobody wanted to pay to warehouse it and wait for markets to develop.I thought, ‘This is so stupid!’ They should have thought of markets before theyhad this mandate. And so that became part of my mission - to create markets for recycled materials. I thought somebody has  got  to do this. I thought of shoes because, going back to my childhood again where I wore sandals from Mexicothat had tire rubber soles, I thought we ought to be recycling tires again and putting them into shoe soles.Lewis began calling mills in the southern United States to inquire about the possibilities of making a shoe fabric out of recyclables. After the mills did not respond to her inquiries, shecontacted Bill Bowerman, founder of Nike and fellow Oregon resident, in order to discuss theviability of producing a recycled shoe. Bowerman recognized that the footwear industryengaged in wasteful practices and was intrigued by Lewis’ idea to produce shoes from recycledmaterials. Bowerman recruited Nike executives to facilitate Lewis’ interactions withmanufacturers and with product designers. In the meantime, Lewis secured a $110,000 grantfrom a local agency that funded projects that attempted to broaden the market for recycledmaterials.With seed funding and technical assistance secured, Lewis began to develop the strategy for launching the “environmental footwear company.” Recycling underpinned the strategy. Lewis pointed to recycling as a way to minimize human impact on the environment and reduce theamount of material flowing into landfills. Raw materials for early “Deja shoes” included polystyrene cups, file folders, rejected coffee filters, baby diapers, plastic milk and soda bottles, paper bags and corrugated cardboard. Besides saving landfill space, she believed that recyclingsaved energy and helped minimize the air and water pollution emitted during the processing of virgin materials. She pointed out that recycling also protects landscapes and animal habitats, asmining, logging, oil production, and other extractive industries are curtailed. Finally, whenconsumers wore the shoes out, they could send them back to Deja to be recycled again.Lewis also began initiating contacts with major international conservation organizations. Shecommitted donating 5% of her company’s pre-tax profits to the Species Survival Commission of the World Conservation Union in Switzerland. She endeavored to source raw materials thatwere sustainably harvested in developing countries, which in some cases would provide analternative to slash and burn agriculture or clearcutting native forests. 2  Deja Shoe (A)  Lewis articulated the company’s vision of “sustainable development”:We believe that economic growth for individuals, businesses, and societies shouldoccur within ecological bounds and limitations set by nature. To be sustainable,development must meet present human needs without impacting futuregenerations’ ability to meet theirs.Bowerman and other Nike executives were instrumental in helping her operationalize this vision.On recommendation from her supporters at Nike, an Arkansas mill agreed to produce a run of five thousand pairs of shoes made from a prototype polypropylene fabric that Lewis developedwith technical assistance from the Amoco Corporation made from pre-consumer disposablediaper waste. But as she boxed the shoes in her basement, Lewis noticed quality problems.Many pairs did not have the proper fit or had components that were not properly stitched andsealed. As a result, Lewis determined only a few thousand pairs could be salvaged from the production run. The Management Team  The experiment left Lewis over budget by $20,000 and with the realization she needed anexperienced management team from the footwear industry to bring the product concept to thenext stage. Lewis learned that Dean Croft, the former President of Avia, lived in her neighborhood. She visited her neighbor Croft at his home, who was impressed with what shewas able to accomplish as an industry outsider. Croft referred her to Scott Taylor, Avia’s former Chief Financial Officer. Taylor drew in Bruce MacGregor, another recently-departed Aviaexecutive.During his tenure with Avia, MacGregor had vice-presidential responsibilities for design, production, marketing, product development, and advertising and promotions at different times.MacGregor had just left Avia when he was contacted by Taylor. MacGregor recounts his initialconversations with Taylor about coming to work at the environmental footwear company:I had said that I’m going on sabbatical for a while and I don’t want to talk  business. He kept after me when I got back from Europe and I said fine. It wasreally more of a favor just to sit down with him and see what was up. So I endedup meeting Julie. The idea intrigued me. I guess what intrigued me is that I sawa shoe that looked brand new. And that startled me.The design, the fit, the comfort - all the aspects of the footwear itself wereabsolutely terrible. Nevertheless, the shoe looked brand new. That was really thefirst time I understood what she was trying to do here. I don’t know what I wasexpecting, I guess maybe soiled shoes or worn shoes!In 1991, the three partners divided responsibilities for managing the company. MacGregor  became President of Deja, Inc. and Taylor became CFO. Lewis took on responsibility for new product development and materials sourcing as Vice-President for Research. The former Avia  Deja Shoe (A)   3    executives funded the next six months of operations out of their own pockets, moved theoperation out of Lewis’ basement and into a Portland area office and began drafting a business plan and raising capital.MacGregor’s and Taylor’s experience in the footwear industry and familiarity with financialmarkets and Lewis’ articulation of the sustainable product concept was received favorably byventure capitalists. In March 1992, Deja received its first round of equity funding. U.S. VenturePartners, Allstate Venture Capital, and BancBoston invested a total of $2.5 million. Some of thesame venture capital firms had invested in Avia when Deja’s new management team heldleadership positions. During Taylor and MacGregor’s tenure at Avia, the company’s sales grewfrom $5 million a year to $200 million. Ann Doherty of Allstate Venture Capital in Chicagoremarked:It was Julie’s vision, zeal, and innovative approach to recycling technology thatattracted the attention and backing of some key business people who have proventrack records in the industry. Allstate reviews more than 600 potentialinvestments every year in a wide variety of industries and funds only about eightor ten. Deja had the right mix of timing, trends, and most importantly, amanagement team capable of pulling it off. The Footwear Market  The market for footwear in the U.S. is approximately 1 billion pairs of shoes per year. Themarket is divided into three primary segments: athletic, casual, and an “other” category thatincludes formal footwear and specialty footwear.Athletic footwear constitutes nearly 35% of the total footwear market and is an extremelycompetitive segment. The athletic segment is dominated by industry giants Nike and Reebok,which together account for over 50% of the $8.7 billion athletic footwear market. Nike’s andReebok’s athletic footwear are manufactured in Asia. For both companies, Indonesia and Chinawere the number one and number two manufacturing locations. Thailand, Taiwan and SouthKorea are among the other nations which produce at least 10% of the footwear products for thecompanies. The low wage rates in Asia contributed to the companies’ 40% gross margin on their footwear products.Among the functions at Nike’s and Reebok’s U.S. headquarters are product design andmarketing. Marketing was an area of particularly intense competition. Market trends showedthat performance was an attribute of athletic footwear that influenced consumers’ purchasing patterns. As a result, Nike and Reebok lured high profile athletic celebrities to endorse and promote their products. Income statements for Nike and Reebok can be found in Exhibit 1 .Smaller companies vie for share in specialty athletic markets by developing performance products for specific athletic activities. In the 1980’s, Avia Group International, Inc. exploitedsuch a niche by focusing on performance footwear for aerobics, cross-training, and tennis. Thisstrategy led the company to the company’s explosive growth before being acquired by Reebok. 4  Deja Shoe (A)
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