Group 13Harsh Vardhan, 1211342Gaurav Singh Dharmshaktu, 1211185

7th October 2013Submitted to Prof. P. D. Jose

Corporate Strategy and the EnvironmentTerm V, PGP 2012-2014

Indian Institute of Management, Bangalore

Seeds of Change

Evaluation of Options before Eric ReyIncorporation of CERs is a breakthrough business model innovation and should be adopted.

Option AnalysisAdditionality Assessment

Portfolio Analysis Recommendations Appendix

Conventionally Priced NUE Seeds with CERs

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Premium Priced NUE Seeds with Enforced IPR

Selling NUE seeds without premium not only maintains the farmers’ seed sovereignty, but also incorporates Arcadia’s humanitarian and sustainability objectives into their business strategy.

By earning CERs, Arcadia can demonstrate how an agricultural technology company can earn profits while running its operations sustainably.

This option addresses the interest of the farmers through the non-discriminatory pricing of NUE seeds.

The activists’ issues of unjust IPR enforcement & greedy differential pricing are also addressed.

The interests of the shareholders & investors is served by focusing on sustainable long-term growth.

China is yet to authorize the planting of NUE seeds.

China has to sustain export of CERs by foreign firms.

The final process output - rice - should be palatable.

The CER earning mechanism under the Kyoto Protocol needs to be extended well beyond 2012.

NUE mechanism needs to be approved as a CDM. The Carbon Emission trading market is very

volatile. The aforementioned risks are external in nature.

Arcadia can manage regulatory risk by entering into strategic partnerships with the Chinese government.

Premium priced NUE seeds cut into the savings that the farmers accrue with reduced fertilizer usage.

Enforcing IP rights, on one hand destroys the farmers’ alternatives, and on the other hand it poses the question of the legality of patenting natural products such as seeds. With the stewardship agreement can render the business unsustainable.

Farmer’s interests are ignored as he is forced to buy new NUE seeds every season. NGO activists will be concerned by IPR & will agitate against Arcadia.

The interests of the shareholders is served in the short-term, but drawing from Monsanto’s case, the environment doesn’t guarantee long-term profits.

Arcadia can potentially go down Monsanto’s path and NGO activism around IPR or Seed pricing or risks to biodiversity can raise serious threats to business.

Responding to agitation, Government can respond adversely & impose price or sales control over seeds.

Agitation might snowball, effect other geographies and render Arcadia incapable of recovering costs.

These risks arise due to Arcadia’s ignorance of IPR issue in the first place. The only way for Arcadia to be able to tackle them is to ditch the plan to enforce IPR.

Evaluation of Options before Eric ReyIncorporation of CERs is a breakthrough business model innovation and should be adopted.

Option AnalysisAdditionality Assessment

Portfolio Analysis Recommendations Appendix

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Conventionally Priced NUE Seeds with CERs Premium Priced NUE Seeds with Enforced IPR

By refusing to indulge in IPR enforcement and instead focusing on CDM, Arcadia will bolster its reputation as a promoter of sustainable agriculture.

Reduced N2O emission will benefit the environment.

Farmers will not only be able to save on fertilizers (40% of crop production cost), but with NUE seeds even the rice yields per hectare might increase.

Less usage of fertilizer will lead to less soil & water pollution (as only a third of the fertilizer is absorbed).

NUE rice in china has the potential to earn $10.22 billion in CERs1. Assuming Eric Rey’s estimate of receiving 50% CERs, that leaves >$5 billion per year.

Proceeding with this option will require Arcadia to secure more investment and focus on other projects as the cash flow from NUE seeds will be delayed.

This success of this option definitely depends on multiple contingencies (fraught with risks). However, despite the delayed cash flows, by addressing the interests of all stakeholders, this option promises long-term growth for Arcadia not just in NUE technology but in other avenues as well.

With the high level of activism involved, this option will harm Arcadia’s reputation in the long-term (just as Monsanto) and eventually lead to loss of business.

Farmers will be able to enjoy cost savings, but they will also have to pay extra for procuring NUE seeds every season, thereby hampering their profitability. This also creates a motive for the farmers to steal.

The benefit to the environment will prevail as long as the NUE seeds are used despite their higher price.

The premium will make sure that Arcadia is able to secure immediate cash streams. However, the profit from the premium will be short-lived and this option can potentially put the continuity of business in peril.

Analysis shows that the CER approach will let Arcadia enter a market with potential of >$5 billion.

This option has already been tried by Monsanto and we are aware of the disaster that followed. Torn between the lure of continuing operations to recover costs and the harsh agitation and regulation to follow, by adopting this option, Arcadia will be ignoring threats in its environment and suffer bitterly.

1 1.94 Million Metric Ton N2O Emission* 310 Global Warming Impact* Spot Price of $17 Per Metric Ton CO2 Emitted = $10.22 billion

Additionality Analysis of N2O Emission Reduction ProjectEven without precedents, the project satisfies all criteria and should be approved as a Small-Scale CDM.

Option AnalysisAdditionality Assessment

Portfolio Analysis Recommendations Appendix

With no IP Rights being enforced, farmers retain their seed alternatives.

There are a number of alternative varieties of rice seeds available in the market - traditional seeds, hybrid seeds, and even other kinds of GM seeds.

Barrier AnalysisCommon Practice

Analysis

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Selling NUE seeds at the same rates as regular seeds, Arcadia will incur heavy losses.

The project’s huge R&D cost will not be recoverable and the project will not be profitable without grant of CER credits.

The major barrier to Arcadia’s proposal is any form of governmental support to Chinese farmers. Price control or subsidies can make it impossible for Arcadia to sell NUE seeds.

CERs will let Arcadia counter such incentives.

The NUE approach to reducing emission is Arcadia’s one of a kind in-built competency.

There is no incentive for Chinese farmers to switch to emission reducing seeds & Arcadia is the sole licensor of this technology.

Identification of Alternatives

Investment Analysis

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Failure of Additionality Criteria for Premium Priced NUE Seeds

There exist two more options before Eric Rey that we have chosen to ignore so far.

Price NUE seeds at a premium and earn CERs simultaneously: This greedy option not only goes against the business principles of Arcadia, but it is also not implementable. While Arcadia charges a premium over the NUE seeds, its project will earn profits without the need of CERs and hence the project will fail the additionality criterion of a CDM.

First price NUE seeds at a premium and later switch to fair pricing with CERs: This option might make sense when looking at the long list of contingencies for the success of the CER model. However, by pricing its seeds at a premium at the beginning, Arcadia will incur reputational damage that’ll herald activism even after the project is deemed CDM

A Portfolio View of Arcadia’s BusinessArcadia needs to diversify and invest in technologies (other than NUE) to boost its growth prospects.

Option AnalysisAdditionality Assessment

Portfolio Analysis Recommendations Appendix

*Reference: Jose P.D.; Corporate Strategy and the Environment: a Portfolio Approach; Long Range Planning, Vol. 29, No. 4, pp. 462-472, 1996

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Environment - Strategy (ES) Matrix*

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Environment Attractiveness ( EA)

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Arcadia’s Current Positioning & Future Transition

All of Arcadia’s research services & products can be considered homogenous in terms of EA & MA.

Arcadia’s falls under the High EA and medium MA category in Cell IV.

Arcadia’s current focus is on developing countries, which are huge untapped markets.

Strategic investing in China using an inclusive business model will help Arcadia move to Cell I.

Arcadia needs to invest in yet newer technologies in order to ward off competition.

Arcadia should focus on its core competencies in NUE, salt tolerance, water use efficiency and Safflower Oil to expand its market share and build steady revenue streams.

Arcadia’s all-inclusive approach is key to the growth of the agricultural CER market in China, wherein it holds the first mover advantage.

Option Analysis

Additionality Assessment

Portfolio Analysis Recommendations Appendix

Develop revenue streams from non-NUE technologies & invest in NUE

Develop revenue streams from non-NUE technologies & invest in NUE

Develop a strategic relationship with the Chinese Government

Develop a strategic relationship with the Chinese Government

●To address the regulatory risk, Arcadia needs to develop favorable relations with the Chinese govt.●Partnering with Chinese research institutions and other stakeholders will help Arcadia.

Bring all stakeholders to a common platform and create a dialogue

Sell as many NUE licenses as possible across the globe

Sell as many NUE licenses as possible across the globe

●By spreading NUE, Arcadia will garner the support of organizations on an international platform.●Arcadia should secure its first mover advantage in as many countries as possible.

Hedge the volatility of CER markets through other instruments

Recommended Future Course of ActionsArcadia needs to develop cash flows from non-NUE technologies, while invest & grow the market for NUE.

Option Analysis

Additionality Assessment

Portfolio Analysis Recommendations Appendix

Considering the scope and application of NUE, why did Eric Rey file NUE as a Small Scale CDM Methodology? Refer to Arcadia’s methodology submission - http://cdm.unfccc.int/methodologies/SSCmethodologies/pnm/byref/SSC-NM082

What is the $5 million contingent liability that Arcadia is carrying on its balance sheet? Refer to Exhibit 3 in case study.

Open Questions

Peeking into Arcadia’s Future (2008-2013)

In 2008, Eric Rey managed to secure $15 million in funding from investors. Arcadia acquired all the necessary patents and the CDM approval for the NUE technology. Arcadia’s strategic relationship with the Chinese government helped the company with smooth approvals and

lead to the Chinese agricultural ministry’s visit to Arcadia’s offices . Arcadia has proposed to share the CERs, earned through NUE, with Chinese farmers! NUE crops still haven't been commercialized (expected to be marketed by 2016).

Appendix ItemsCollection of due diligence questions, observations and articles.

Miscellaneous Articles

Eric Rey’s interview in March, 2008 - http://www.atelier.net/en/trends/articles/interview-arcadia-biosciences-more-profit-and-less-pollution-farming

CER markets have shed their volatility since 2011-2012 - http://www.sendeco2.com/uk/precio_co2.asp?ssidi=3

Mahyco bought Arcadia ‘s NUE on 30th July, 2013 - http://www.thehindubusinessline.com/industry-and-economy/agri-biz/mahyco-buys-arcadias-technology-to-develop-nue-rice/article4970370.ece

Is Arcadia agreeable to Greenpeace - http://www.bbc.co.uk/blogs/ethicalman/2009/03/is_the_green_movement_part_of_the_problem.html

Arcadia Newsfeed - http://www.arcadiabio.com/news