SCHOOL OF ECONOMICS, FINANCE AND BANKING

BEEB5053
MICROECONOMICS ANALYSIS

Hop Compost: Maintaining Environmental Accountability

with Growth

Prepared for:
Associate Professor Dr. Shri Dewi a/p Applanaidu

Prepared by:
No. Name Matric number
1. Hafawati Binti Mohd Radzi 829390
2. Aina Faieqah Binti Zabri 829313
3. Thivisha Maran 828431
Part A: Whether to pursue B Corp certification.

1) What are Hop’s biggest risks at this time?

The largest risk for Hop's Compost at this early stage is investing resources to pursue B Corp
certification. As an early stage investors, incur the most risk by investing in the firm initially.
However, in addition to ensuring that the technology works, the investor must ensure that there
is a genuine market demand for the product. This B Corp certification procedure might be time
consuming and costly. Because he is only starting out, Davies must continue to improve his
operational for profit criteria. As a B Corp, he must present the most recent documentation
anytime he changes practises, which will take extra time.

2) What should Hop’s strategic focus be for the next year?

Firstly, Hop should focus on increasing the total income and maximizing profit of the company.
Profit maximization is the main goal or objective of all businesses. Hop should also try to
reduce the production expenses in order to gain more profit. Based on study by (Dey, 2007), a
firm can maximize profit either by increasing per unit revenue or decreasing per unit cost or
doing both simultaneously. There are many ways to increase the revenue such as increase the
number of customers, diversify the types of products or services and offer discounts. Finding
new customers is important but retaining regular customers is even more important in keeping
the hop business running smoothly. For example, Hop can provide special incentives to their
regular customers to build loyalty by offering coupons, rebates and discounts.

Furthermore, opening new branches across the United States is a good long-term
business goal. It is very nice if Hop able to open new branches in the United States in the near
future as planned in Vancouver and Toronto. The first and the most important purpose of the
growth in businesses is that it provides businesses with advantages against their rivals and help
them to become resilient against difficulties (Durmaz & İlhan, 2015). In addition, growing in
business allow products and services to be tested in new markets and also increasing brand
visibility to reducing business risk. So, the company will get more profit by exposing the brand
name in new markets.
 Last but not least, Hop must pay an attention to employee welfare as well as machine
maintenance. This is because human capital, machinery and other physical equipment are very
important to sustain the production and growth of the company. There is no point in opening
a new branch if Hop is not able to maintain their existing performance. For example, HotRot
1811 is a system that monitors the compost’s temperature, pH, and level of carbon dioxide. In
order to use the HotRot system, maintenance is required, and the company has to bear the cost
of the system power consumption range from about 20 kWh per tonne of waste to about 35
kWh per tonne. However, the cost will depend on the amount and type of material being
processed.

In conclusion, Hop should focus on how to maximize the company’s profits, open new
branches as well as take care of existing assets. Hop should also emphasize the company’s
objectives in the short term such as creating profiles on social media, best employee award
programs and even increasing production sales. Thus, Hop will have a clear guideline to run
the business.

3) Should Hop invest the time and resources into the B Corp certification or use its
constrained resources to grow as quickly as possible?

First of all, lets have a look on the advantages of obtaining B Corp certification. It is very useful
as a credible signal to the stakeholders about the sustainable nature of the company hence will
attract investors and customers who care about environmental sustainability. Other than that,
B Corp certification also help in solving internal problems in order to achieve the company’s
dual nature purpose. In time the company will grow bigger and also become harder to keep the
company in the right direction of environmental sustainability without a proper audit. In
addition, obtaining B Corp certification also can improved company’s reputation, gain
customer confidence, and put the company in the right direction towards its purpose.

However, there are also disadvantages of acquiring certification such as the time that
Hop need to put into the process of obtaining certificate. The time that going to use for
documentation, auditing as well as to prepare for all the certification assessment can also be
useful for Hop to focus for the expansion of the company in Vancouver. Another problem of
obtaining certification is the cost that the company need to put aside just for the process and it
can be as high as $25,000 per year, which can be a negative impact towards company financial
especially for small and start-up businesses.

Hence, these matters give effect towards board directors decision, even though the
advantages outnumbered the disadvantages of obtaining B Corp certificate but 5 out of seven
board directors agreed to not get the certificate. This is because, from point of view these
directors, certifying Hop immediately would be a waste of financial and human capital, and
they also suggested to wait for a better time in the future. One of the board directors also stated
that Hop does not need external certification board to show that their company is actually
focusing on social and environmental impact, because it is already shown in the company’s
operations. For example, in the first year of operation Hop already plays an important role in
reducing greenhouse gas (GHG) emissions by diverting two million pounds of food waste away
from landfill.

In addition, the article from (Paelman V., Van Cauwenberge P., Vander Bauwhede H.,
2021) which has observed 129 firms that were certified between 2013 and 2018 with the data
of 6 years prior and 5 years post certification indicate that certification will positively affect
company growth and it requires some time for its full effect to become apparent. However, an
article from (Parker S.C., Gamble E.N., Moroz P.W., Branzei O., 2019) who had observed 249
mainly privately held North American certified B Corporations over 2011–2014 identified that
a short-term growth slowdown arising from certification, which is more related for the smallest
and start-up businesses. The result also explained by the reduction of company resources due
to certification audit procedure. Lastly, the research from (Martin C., 2020) regarding the
investigation on the reasons the company forgo their B Corp certification shows that 34% of
certified B Corp decide not to recertify because it was no longer the best interest of the
stakeholders. This decision was made due to many reasons, which some of the reasons are
regarding the annual cost and the amount of work and time needed for auditing process.

After taking into consideration of the discussion from board directors meeting, as well
as literature review regarding the growth of the companies that have taken B Corp certification,
we have come to a decision where Hop is better to use their time and money for the expansion
rather than investing it for B Corp certification. Investing in B Corp certification surely will
have a positive impact for Hop, hence the company will consider taking the certification in the
near future after further calculating the cost and profit of the company.
Part B: How to position Hop’s social and environmental impact for investors.

4) What would motivate a new investor to join Hop?

The main purpose of investment for investors is to gain financial returns from the capital
invested and the traditional train of thought of investors also stated that the profit gain will be
reduce if the business is focusing on social and environmental impact. This has been a problem
for Hop to gain investor’s confidence in investing in Hop dual nature business and with the
expansion plan especially in Vancouver, the company need to raise fund about $800,000.

However, Hop could motivate a new investor to join the company by convincing them
through the company’s operation, marketing strategy and the financial return for previous
investors. Even though it seems like Hop main purpose is on social and environmental impact,
but it is also the major profitable gain for the company. For example, reducing food waste from
restaurant also give profit for Hop as the restaurant paid for every pick-up services. Next,
producing high quality compost from food waste generate incomes as it is demandable by
farmers to produce high quality agricultural products. Lastly, reduction of large-scale
greenhouse gas emission through diversion of food waste positively increase revenue by selling
carbon credit and generate $60,000 for 30 tonnes. By the end of 2017, the company also
predicted to sell 70 tonnes of the carbon credit.

In addition, within the first year of business Hop able to provide high in the return on
investment of 140% towards its investors. Hops strive to keep the return as high as possible to
maintain Hop’s value and working hard on the expansion of the business. With the exclusive
rights the company possessed to the technology equipment, Hot Rot, makes the company
valuable and advantage to spread its wings to other places such as Vancouver, Edmonton,
Toronto, Ottawa, Montreal, and four cities in the United States. Even now, Hop already
established network and marketing plan and has obtained 2/3 capacity by the launch date in
Vancouver.

To conclude, with all these reasons it should not be a problem for the investor to provide
capital since Hop is responsible and reliable both towards social and environmental impact and
also for the stakeholders. Investors should be motivated to join hop as it is not only good in
investment return but also improve investors profile in preserving environmental sustainability.
5) What foreseeable legislation could you see potentially benefiting or harming Hop’s
operations?
Business operations can be controlled through legislation and mainly acts as a constraint
towards business. however, one can be benefiting through the implementation of legislation
while some may suffer due to the nature of business did not follow the standard practice of
legislation. The example of the areas of legislation that affect businesses operations are
employment law, consumer protection as well as competition law.

The first foreseeable legislation which seems potentially benefiting Hop’s operations is
environmental law. In Calgary, Canada, environmental sustainability has also become a long-
term goal and has begun the process in order to shape their future towards sustainability. The
example of project that was imagine CALGARY with the goal to produce a long-range urban
sustainability plan for Calgary. One of the plans includes waste management which to assist
the development of market that use waste as resources, expand recycling program in the city
which will create awareness of people towards waste management, promote opportunities for
industries related to waste management and foster markets for construction waste materials.

Another target in waste management plan is to support the use of organic materials for
composting, which is the main business of Hop that use food waste to produce high quality
compost for the community farmer. Hence, with the opportunities and support from the city
itself can be a great advantage towards Hop’s operations and easily attract a lot of customers
since most of the citizen aware about positive impact of sustainability.

The second foreseeable legislation that potentially benefiting Hop’s operations is

Investment Canada Act (ICA). According to (Grover, 1985), ICA is based on the assumption
that new investment in Canada that contributes to economic growth and employment
opportunities should be encouraged, whether the source is foreign or domestic. Therefore, the
ICA can assist investors and others who interested in the application of the legislation to
understand how such non -Canadian investors respond to the requirements of the Act. For
example, investors will be provided with some advices and information on doing business in
Canada, going to the site visits and strategic market intelligence on certain industries.

Thus, this ICA may help companies to access programs, local opportunities, and
networks. In the case of Hop Compost, ICA can help the company to attract more investors
whether domestic or international. Hop is a start -up company whose finances are still not very
stable even though their business is consistently successful through 2015. This investment law
can help Hop to strengthen their position in the business world as well as grow the company.
By having more investors, Hop can focus on spread its wings in other cities in United States.

In conclusion, environmental law and investment law have the potential to benefit
Hop’s operations. Hop can grow its business not only domestically but also internationally
when they can attract more customers and investors.

6) How should Davies position Hop’s social and environmental benefits for traditional
investors who focus on return on investment for investment decisions?

Return on investment (ROI) is a key performance indicator that is frequently used by

organisations to measure the profitability of an expenditure. It's especially important for
tracking progress over time and removing uncertainty from future business decisions. Any
organisation, regardless of size or industry, can benefit greatly from the capacity to measure
return on investment. To position Davies should focus on qualitative characteristics. Financial
information must have certain essential and desirable characteristics to be useful to investors,
creditors, and other stakeholders. These features are referred to as qualitative characteristics of
relevant financial information.

They should prepare financial information the power to influence user choices. This
capacity develops when the information has predictive, confirmatory, or both significances. In
the perspective of materiality, relevance is applicable. This materiality will make the quality of
financial information that makes a misrepresentation substantial enough to influence the
choices that users make based on that information. By improving the qualitative features its
automatically improves the usefulness of financial information.

However, they do not compensate for a lack of relevance or accurate presentation, and
their absence renders the material meaningless. They assist in deciding between two equally
relevant and truthful and faithful accounting options for a single transaction. Financial
information preparers must strive to improve their qualitative qualities to the greatest extent
possible. There are three important key which are comparability, verifiability, timeliness, and
understandability are examples of qualitative traits that may be improved.
 First, there's comparability, which necessitates financial data being similar across time
and firms. For example, compare themselves to Compost Ninja, one of Canada's oldest
composts so Hop's might gain consistency via this similarity. Aside from that, verifiability is a
quality that allows a group of experienced users to agree that a certain piece of financial data
is accurate. It may make financial statements more valuable by assuring consumers that they
are accurate and fair.

Not only that, but one of the most crucial factors they should enhance is timeliness,
which occurs when financial data is made accessible early enough to influence consumers'
actions. Finally, understandability refers to the ability of financial information to be
categorised, described, and presented in such a way that people with a fair understanding of
business and economic activity may comprehend it. Hops will be able to attract conventional
investors with the aid of all these keys.