Business Ethics and Social Responsibility: A Case Study of Herbalife

This case study examines Herbalife, a prominent multilevel marketing (MLM) organization, focusing on its business ethics and social responsibility. It addresses allegations of Herbalife operating as a pyramid scheme, differentiating between legitimate MLM models and fraudulent pyramid schemes. The analysis covers aspects like recruitment practices, internal consumption, and profit sources, contrasting them with ethical business operations. Furthermore, the study explores Herbalife's corporate social responsibility (CSR) initiatives, including its involvement in global health programs, the Herbalife Family Foundation, and disaster relief efforts. The conclusion emphasizes the importance of legitimate business models over pyramid schemes and highlights the positive impact of CSR on business growth and brand value. The document is available on Desklib, a platform offering solved assignments and study tools for students.

Business Ethics &
Social
Responsibility

INTRODUCTION
•Business ethics and social responsibility is
termed as the contribution of the business
organisation towards society and for its
welfare.
•Multilevel marketing (MLM) is defined as
the direct selling approach in which profits
and commissions are earned by direct
selling of products as well as encouraging
the recruitments of new distributors as they
also made sales.

CASE STUDY HERBALIFE
•Herbalife is one of the well known and
successful multilevel marketing
organisation. It deals in the personal care,
weight management and nutritional care
products.
• Despite great success and popularity all
over the world the organisation faced
allegations of having pyramid scheme
instead of MLM operations.

Misinterpreting multilevel compensation model
with pyramid scheme
• Multilevel marketing has been adopted as legitimate business model but
still there are several countries and organisation which consider this direct
selling approach as pyramid scheme.
• One of the reason for strong resemblance and association of pyramid
scheme and MLM is that they both involves the recruitment of new
participants for selling the products.
• The MLM model of Herbalife is also misinterpreted as pyramid scheme
and these accusations were claimed by one of the potential investor of the
organisation, William Ackman.

CONTINUE....
As compare to the overall product sales
the major source of profits for the top
level contractors was claimed to be from
the sales made by down line commissions
in recruitment chain.
• In addition to this for supporting strong
claims against Herbalife as pyramid
scheme it was also claimed that at the top
level or by recruitment process huge
profits can be earned.

CONTINUE...
 Another critical factor which gave strong support to Ackman and
other critics was internal consumption. It has been observed that
many contractors and stakeholders of Herbalife purchase
products for self use.
 Thus there is high percentage of internal consumption. Though
high rates of internal consumption does not assure or certified
pyramid scheme but for MLM it can be an alarming situation.
There have been evidences of practices similar to inventory
loading which makes MLM suspicious of pyramid scheme.

Difference between pyramid scheme and
legitimate business model
• A legitimate business model incorporates the profits by selling
their products with highly quality and all participants gets fair
share of return against their investments.
• Contrary to this pyramid scheme is considered as the
fraudulent business model in which there are high probability
that investors may not get their profits and only few members of
the pyramid may get benefits. The businesses based upon
pyramid scheme may gradually collapse.

CONTINUE...
• Another significant difference observed in both of these models is
that the fundamental approach or strategy to gain profits in legitimate
model is to use marketing strategy and networking which can
increase the sales.
• However in case of pyramid marketing the key source for earning
profit is to offer franchise or contractor-ship to others.
• It has been also analysed that pyramid schemes are highly unstable
because after certain period or length of expansion of pyramid
scheme the availability of new participant become short and
investment return for the lower level of pyramid reduces.

CONTINUE...
•The inventory loading of pyramid scheme is compulsory and in order to
become direct seller or the distributor it is compulsively practised.
However legitimate internal consumption is voluntary and does not serve
as requirement for getting authority for direct selling.
•Another difference between pyramid scheme and legitimate business
model is that legitimate models always have some sort of retail or selling
exterior to their network. For instance in the given case study of Herbalife
though organisation has multilevel marketing but it also allows online
platform to purchase the products by retain customers.

CONTINUE...
•Legitimate business mode is the process of selling product or services in
direct manner. On the same side, Pyramid scheme model is the another
major effective model which helps to attract business proposition to many
people.
•As compare to Legitimate business model pyramid is work on the low
quality goals which somehow impact the business product or services.
However, this gives the negative impact on the company outcomes and
performance. Besides, that it also affect the customer expectation to the
company.